Nomura has upgraded Imperial Tobacco from reduce to neutral, saying that a focus on operational pressures has shifted to the prospect of M&A.

Nomura downgraded the stock to reduce back in November on the back of concerns over margin pressures and the view that major M&A activity in the sector would not materialise until late 2012 or 2013.

"Post the resolution of government stake sale at JT [Japan Tobacco] in April/May, and the medium-term strategy outlook presentation from JT as well in April - we see the investment case inevitably being more influenced by prospects for consolidation activity and less influenced by prospects for earnings cuts on risks of underperforming versus consensus (volumes and margins)," the broker said.

Imperial announced yesterday that reported stick equivalent volumes fell 7% in the three months to December 31st. Nomura notes that this leaves the company needing 0.7% volume growth over the remainder of the fiscal year to hit the broker's forecast of a full-year volume decline of 1.3%.

The broker maintains its 2,150p target price.

Imperial shares were up 0.26% at 2,309p in mid-morning trade.

BC

Related share prices
Imperial Tobacco Group (IMT) share price