Investec has reduced its rating for tobacco and cigarette giant Imperial to 'hold' and cut its target price from 2,580p to 2,450p, saying the first quarter was the signal to prompt the abandonment of its 'buy' case.

"The Q1 felt like a signal event to us. Sales were barely ahead against a weak comp and profit is set to be lower in H1, as tough conditions in Europe and elsewhere press on IMT's organic growth aspirations," said analyst Martin Deboo.

He said that the response to weak profits is to seek fresh cost savings, which are estimated to be around £150-200m annually, but this looks "challenging".

"The prospect of a take-out at a premium has been a foundation of our 'buy' case to date. We think that the probability has increased, if anything, as the result of IMT's travails. But the complexities of any move render it unlikely, in our view, on the 12-month horizon that we work to."

While Imperial trades at a 27% discount (on a price-to-earnings ratio basis) to sector peer British American Tobacco, Deboo said that the latter is expected to grow faster.

Furthermore, he said: "in an increasingly 'Darwinian' investment climate that seems to favour industry leaders, we don't think that this is a gap that is likely to close any time soon."

Shares were down 1.11% at 2,321p by 09:51 on Friday.

BC

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