After three years of outperformance for Tobacco (up 75 per cent versus the Euro Stoxx 50 at -14 per cent), there is a risk of underperformance (at least on a 12-month view) as many of the drivers of the 19 per cent per annum average total shareholder return (TSR) since 2009 are less supportive from here, analysts at Nomura are saying this morning.

On average the broker sees the sector´s TSR coming in at just 3.4% over the next 12 months and has moved to a 'bearish' sector rating, from 'neutral' previously.

The drivers which Nomura now expects to turn less supportive are:

1. Regulatory news-flow: While ever present for the sector it risks a period of further depressing sentiment as anxiety over new initiatives (plain packs, ingredient controls) threatens to weigh on multiples.

2. Fewer cost-saving (and margin enhancing) opportunities: The broker believes that this is especially so for Imperial, although less so for BAT - "we expect less support for profit progression in the medium term from the group," they say.

3. Trends in tax structure: These are expected to limit pricing more so than in the past in Western Europe. As well, heightening regulation in emerging markets could mute volume progression in the medium term. Average organic sales growth of 4.6% per annum has relied on firm pricing dynamics in Western Europe and volume in emerging markets.

4. Falling risk-free rates and an increasing equity risk premium have been supportive of a widening premium for Tobacco. Nomura assumes these variables are at best now stable, "providing less fuel for out-performance."

Despite the above, Nomura adds that: "we also see a need for the market to better differentiate the valuation of the major tobacco names to reflect diverse operational outlooks. We retain a Buy rating on British American Tobacco (12-month total shareholder return (TSR) 14%) and move Imperial to Reduce (TSR -1%) with a 3% target price cut to 2,166p. We retain our Reduce rating on Philip Morris (TSR -2.5%) with a target price +4% to USD 83.70. We cut our fiscal year 2013 estimated earnings per share by circa 2% for the three names."

As of 09:55 shares of Imperial Tobacco are falling by 1.2% to 2,342p.



AB

Related share prices
British American Tobacco (BATS) share price
Imperial Tobacco Group (IMT) share price