We are leaving our fair value estimate for Imperial Tobacco in place following the trading update given by the firm on March 25. Although it did not provide specific figures, Imperial stated that its financial performance so far in fiscal year 2009 is in line with its earlier forecast. We infer that the firm's performance is also tracking our expectations.
In addition to providing the trading update, Imperial reiterated its opposition to the proposed ban on tobacco product displays in the United Kingdom and also said that evidence from other countries suggests that the ban would have negligible impact on consumption.
The firm also provided some more colour on the potential impact on the consumption of fine cut loose tobacco in the United States, where a staggering 2,000% increase in the federal tax rate takes effect on April 1. Imperial said that it expects the market for roll-your-own tobacco to be cut in half following the tax hike. We expect significant migration to discount cigarettes to occur, and we expect Imperial and Reynolds American to be the main beneficiaries of the shift in consumption patterns. However, fine-cut tobacco is a small market relative to the total tobacco industry, and we are leaving our fair value estimates for these firms in place at this stage.
Philip Gorham is an equity analyst for Morningstar.com.