Despite the smoking ban, health risks and the recession, people still love - or are addicted to - their cigarettes, which is benefiting Filtrona, the plastics and fibres business.
The company, whose products include cigarette filters as well as lamination for passports, has just issued an upbeat trading statement, with third quarter revenues and profits were both ahead of expectations. Part of this was due to "the defensiveness of the tobacco industry [which] has continued to benefit both coated and security products and filter products", according to the company.
It also emphasised its caution with regards to takeovers. It was outbid in an auction for a "significant" acquisition - supposedly by a private equity group - but the downside of that is it will take a £1.9m charge for transaction costs.
All in all though, the update has lifted Filtrona's shares 8.5p to 168.3p, making its the biggest riser in the FTSE 250.
Analyst Andrew Darke at Ambrian issued a buy note on the business, saying:
[Today's] comment was clearly more positive than the interim results announced two months ago. In particular, the increase in margins reflects the benefits of cost cutting as well as the self help that new products and customer acquisitions have achieved on the revenue line. Whilst markets have certainly stabilised, there appears little evidence as yet of a more general upturn in economic activity.
The performance also demonstrates the resilience in the core parts of the business. We estimate that over half the group revenue base is now in the tobacco industry and, as such, relatively resilient, particularly as over 40% is in emerging markets rather than the mature markets of Western Europe and North America.
The group was sufficiently confident to attempt a significant acquisition. Our understanding is that Filtrona was outbid by a private equity firm, which in itself demonstrates the emerging confidence and valuation metrics in many of the areas that Filtrona operates in.
The greater divisional disclosure has facilitated improved investor understanding of the business and is reducing the conglomerate discount the shares have traded under. Were the shares to trade on an EV/EBITDA of 8 times (not an unreasonable multiple based on comparable deals, operating margins and return on average capital employed), the share price would be in excess of 230p, a 44% increase on current levels.
