Good returns on offer

Byline: ANDREW MILLER

IMPERIAL TOBACCO - We are retaining our buy recommendation on Imperial Tobacco. Aside from the fundamentals of the business, which we believe to be strong, we also suspect that the synergies from Altadis are likely to come in above guidance.

With the market increasingly looking for undervalued quality growth stories, we think the shares are unlikely to remain cheap for long.

On ten times next year's calendar earnings, imperial is trading at close to 10-year lows in terms of valuation, with forecast earnings growth sitting above its 10-year average of 16%.

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The payout ratio is moving back in the right direction, with the group offering a 5% dividend yield next year and the group has a 10% Free Cash Flow yield at these levels.

In terms of drivers, we believe that new CEO Alison Cooper's stated focus on top line growth may start to change the market's perception of the group. Also, the Capital Gains Tax Christian louboutin shoes liabilities for Logista expire in August 2010, raising the possibility of a sale.

We also believe that there is an increasing likelihood of the US government backing down on the current ban on Cuban cigars. As market leader in the category, Imperial is an obvious beneficiary of such a move.

NATIONAL GRID - National Grid recently announced a pounds 3.2bn rights issue to finance a step up in capex in the UK.

While the timing of the announcement took investors by surprise, we believe an early move presents the benefit of removing the overhang on the shares and enhancing clarity on the group's long-term prospects, its financing and its credit rating.

With the proceeds being reinvested in the UK, National Grid's core market, where the group enjoys attractive returns and the support of both the UK government and the regulator, we believe the rationale for the rights issue is very sound and see limited regulatory risks.

The fact that management chose to raise capital rather than cut dividends also shows its commitment to shareholder returns: the target of growing dividends by 8% per annum to 2012 was reiterated and new guidance of at least real growth post-2012 was announced.

At 9.5x March 2011 PE (the ratio of price to earnings) and 7.3% yield, national grid remains Gucci 105 Series GG Pattern Dial Mini Ladies Watch YA105529 a core holding in our view for its profits visibility, inflation-linked revenues, high dividends and now even greater growth prospects in the UK.

In the US, we continue to see potential upside from the upcoming rate cases. We have revised our Earnings Per Share estimates to reflect the rights issue. Our new fair value of 614p (previously 750p) is also post-rights, and after the 2010 final dividend of 24.5p.

Andrew Miller is head of the regional office of Barclays Wealth in Newcastle

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