Gallaher makes progress
Pretax profits at Gallaher increased 14.7% from ?225m to ?259m in the six months to 30 June on net sales, excluding duty, up only 5.1%. It is interesting to note that the value of sales including duty rose 2.1%. In other words, despite increased taxes in developed countries Gallaher has managed to increase its average cut from each packet of cigarettes.
Chief executive Nigel Northridge says the results demonstrate the effectiveness of Gallaher's international expansion, which has produced organic growth despite significant challenges in some European markets.
The strategy is to maximise cash flow from key EU markets to fund international expansion through exports, local investments, joint ventures and alliances.
Today’s results reveal an inevitably mixed picture. For instance, Gallaher edged up its share of the UK cigarette market to 38.6%, maintaining its lead in the high-margin premium cigarette and cigar markets, and making gains in handrolling tobacco.
However, the UK cigarette market overall declined by 4-5% and smokers moved down from premium brands to cheaper ones. Gallaher’s total sales slipped from 9.4bn cigarettes to 9.1bn. This decline was offset by price increases, so UK sales were up in value.
The smoking ban in Scotland caused fluctuations in sales as vending machine operators cut back but the overall effect seems to be a fall of 3-4% in cigarette sales and 5% in cigars.
Gallaher continued to expand across central and eastern Europe despite difficult trading conditions in Poland. Other good spots were Taiwan, Guinea, South Africa and Lithuania.
The news from Cita Tabacos de Canarias, the Spanish company acquired in January for ?78m, is less encouraging. In the light of the challenging conditions in Spain, targets set for CITA will not be achieved until 2008. CITA actually made a small operating loss in the first half but as the benefits of restructuring come through it is expected to move into profit in the second half.
Gallaher has increased its interim dividend from 10.6p to 11.2p. Northridge says expectations for the full year remain unchanged.
The shares were unchanged at 905p this morning, close to their recent peak. They have recovered almost all the ground they lost between March and June when they slumped from 920p to around 800p.