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Imperial Tobacco's 2009 confirms our thesis 

Imperial Tobacco reported solid fiscal 2009 results that confirm our thesis that the firm's positioning in value categories will give it a short-term performance boost. We are maintaining our fair value estimate.

Fiscal 2009 net tobacco revenue grew 5% after adjusting for foreign exchange movements and the acquisition of Altadis. We think this is very respectable, given the economic challenges in the firm's key markets, but we doubt that this level of growth will be sustainable in 2010. Imperial's product portfolio is concentrated in value categories, and volumes have benefited from smokers tightening their belts in recent quarters. However, if global consumer sentiment recovers next year and smokers resume their migration to more expensive brands, we expect the premium products of rivals such as British American Tobacco and Philip Morris International to more effectively exploit that trend.

Imperial's drive to cut costs yielded some results in fiscal 2009, with the operating margin increasing 130 basis points to 15.8%. Although we are impressed by this performance in a challenging environment, we expect the firm's newly acquired logistics business to face rising costs in the near term from higher energy prices.

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