Tobacco sector feels the heat

 

TOBACCO stocks were dragged lower by the growing prospect that a total smoking ban in England will be in place by the summer of next year. The government is now prepared to allow a free vote on the issue. That means a compromise deal, which allowed some pubs to remain open to smokers, will almost certainly be stubbed out.

With that in mind, Morgan Stanley says the sector's underperformance may continue. However, the US broker thinks the impact of a total smoking ban will be manageable. It expects an extra drop in cigarette consumption of 4-5% (on top of a trend decline of 3-4%), but says manufacturers should be able to offset the added decline in consumption through price increases.

However it fears Gallaher (10p cheaper at 844p) could remain under pressure in the short-term and thinks it may have fired the opening shots in a price war. In launching the value cigarette brand Sterling at £3.99, it will compete toe-to-toe with Philip Morris's new basic offer. The equilibrium may be well and truly disturbed if Imperial Tobacco (32p down at 1658p) wades in with its own ultra-low price alternative.

BAT, the Lucky Strike, Pall Mall and Kent group, fell 27p to 1242p. With only 5% of the UK cigarette market, it is Morgan Stanley's favoured stock. Its 12-month target price is 1560p.

On a brighter note, Morgan Stanley says the Fed's interest rate cycle should peak around the end of the first quarter or early in the second. It also reckons defensive stocks will move back into fashion, so tobaccos could be looking a good prospect again, particularly if the current underperformance persists.

Investors pulled the plug on telecoms following a shock profits warning from France Telecom. Europe's second-biggest phones company said revenue growth was 2% to 3% in 2005. In October it had said it was 3%. France Telecom plummeted 129p to 1349p, while British Telecom lost 2½p to 220½p, Cable & Wireless 3½p to 123¾p and Vodafone 2¼p to 128¾p.

The Footsie, up 13 points at the outset, drifted to finish only 3.6 points higher at 5,735.1. The Bank of England's decision to leave interest rates on hold at 4.5% came as no surprise but an early 46 point fall on Wall Street prompted sporadic bouts of late selling.

Credit Suisse First Boston forecasts a 20-50% rise in metals and mining stocks this year. RioTinto leapt 61p to 2780p and Kazakhmys 21½p to 791½p.

 

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A revival of the ancient RoyalDutch Shell takeover rumour accompanied a 54p gain to 1982 in Cairn Energy. Oil and gas facilities service provider Petrofac soared 28½p to 308½p. It expects results for the year to end-December 2005 to exceed expectations.

News that Well 115 at its Zhengeldy oil field in Kazakhstan is producing clean oil after having originally been categorised as dry, sparked heavy buying of Caspian Holdings, 8p up at 16½p.

Max Petroleum gushed 3½p to 125p following its acquisition of the Astrakhansky Exploration Contract in Western Kazakhstan which totals 1,272.6 sq.kilometres. Tim Whittaker, who was drilling manager at Maersk Oil, has been appointed drilling manager in Kazakhstan.

 

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Former Orange boss Hans Snook's appointment to the board and purchase of a 3.1% stake (1.8m shares) lifted 3-D technology developer DDD Group 2p to 14p. Fonebak, the mobile phone refurbisher, jumped 12p to 159½p after founder and chairman Gordon Shields sold 3m shares or 15.5% via KBC Peel Hunt at 150p per share to satisfy institutional demand.

Fuel cell systems developer and manufacturer Voller Energy advanced 11p to 51p after receiving notice from the Patent Office that its Mains in a Box patent will be granted on January 18.

Interactive educational children's toy company Bright Things crashed to 35½p and closed 15¾p down at 39¼p. Investors threw their toys out of the pram after the company warned that its pre-tax loss for the year to end-March will be £4.5m to £5m. Placed on AIM at 10p, the Jersey-based Greenhouse Fund closed at 15½p.

• THE appearance of futures broker Man Financial on its share register with a 9.3% stake breathed life into cash shell Voss Net, ½p better at 4⅝p.

In October Voss said it was seeking acquisition targets. The rumour is it has a 'reverse' takeover deal up its sleeve. Cash shells on AIM face possible expulsion from the market if they do not find a suitable deal by April.

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