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This pub group’s shares may have gained 40pc since April but it still looks exceptionally cheap


A rally of more than 40pc from the year’s low in April helps to justify this column’s patience with pubs-to-hotels group Fuller, Smith & Turner and any further improvement in trading could (finally) take us into the black on this position, first taken two years ago.

Working from home, train strikes and input cost inflation may have crimped the pace of the post-lockdown recovery but Fuller’s well-tended estate in London and the south of England is showing strong footfall despite some very variable weather.

First-half results published last week for the six months to September showed double-digit percentage increases in revenues from food, drink and accommodation. Profits rose sharply, cash flow was good and the company increased its interim dividend by 42pc, adding a new share buyback programme as it did so.

And the buyback is one of those that genuinely make financial sense, because the shares continue to trade a long way below net asset value. The company’s £386m market value compares with equity or net assets of £442m, and that latter figure is based on property valuations that date back more than two decades in many cases.

An indication of the value that lies within Fuller, Smith & Turner comes from the £17m profit that the company will book on the sale of a property in Southwark, London, for £20m when the deal closes next year.

Risks remain, especially from further train strikes, sticky inflation or “higher for longer” interest rates, which drain away consumers’ confidence and cash. But even then the valuation and strong balance sheet offer protection.

In the meantime, the dividends and buybacks mean investors are gaining some reward for their patience.

It is worth bearing in mind that by the time Fuller Smith & Turner completes the new buyback and pays its final dividend for fiscal 2024 next summer it will have returned some £200m in cash to shareholders over a decade, no mean sum relative to the current market value.

Fuller Smith & Turner still looks very cheap. Hold.

Questor says: hold

Ticker:  FSTA

Share price at close: 646p

Update: Imperial Brands

Shares in Imperial Brands are busy doing nothing in many ways – they trade no higher than they did 14 years ago – but the company keeps churning out the dividends and hence could well remain a staple for income investors.

The fat dividend yield of about 8pc and lowly valuation – the forecast price-to-earnings ratio is around seven – suggest that the market remains concerned about the long-term future of smoking as regulatory pressure and health campaigns continue to weigh on volumes.

Nevertheless, the latest full-year results, released last week, show that the FTSE 100 company remains highly profitable and cash generative as efficiency drives and pricing power continue to offset the relentless decline in the number of cigarettes sold.

That pricing power comes from the company’s array of key brands, which include JPS, Davidoff and Gauloises.

Pricing power is always valuable but is all the more so when inflation is high and businesses face pressure from rising costs, because it helps to protect lofty profit margins, which in turn support the cash flow that ultimately funds dividends.

The dividend cut of 2020 is now fading from memory as Imperial increases its dividends for the third time in a row and confirms plans, first mentioned alongside October’s trading update, for a new £1.1bn buyback – an increase on the £1bn bought back in the financial year to September.

Add the two together and, based on analysts’ forecasts of a further small increase in the dividend for the year to September 2024, Imperial is on course to return the equivalent of nearly 15pc of its market value to shareholders in cash.

As it enters the fourth year of chief executive Stefan Bomhard’s five-year turnaround plan, Imperial is nevertheless having to work hard.

Its medium-term plan is to grow sales and operating profits at a mid-single-digit percentage rate, although in the 2024 financial year Bomhard expects low-single-digit sales growth and a mid-single-digit profit increase, with the bulk of the earnings improvement expected to take place in the second half of the year.

That sort of forecast tends to make investors nervous, as it suggests that more than a few things need to go right towards the end of the year for forecasts to be met. But again, the shares already trade on a lowly valuation and offer a plump yield to reflect this risk.

Imperial will have income attractions for many investors. Hold.

Questor says: hold

Ticker:  IMB

Share price at close: £18.48

Russ Mould is investment director at AJ Bell, the stockbroker

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