The upgrade came as the US investment bank nudged down its target price for the FTSE 100-listed firm to 1,650p from 1,700p, albeit with the shares trading currently at 1,298p, up 2.2% on Thursday’s close.
In a note to clients, JPMorgan’s analysts said: “We see current valuation as pricing in severe downside risks, leaving risk/reward tilted strongly to the upside following the dividend cut this May.”
They added: “Supported by its robust FCF (19% 21e FCF yield), we see IMB’s c50% payout ratio as sustainable with a further £1bn+ p.a. available for cash returns or M&A from FY23e in our base case. We forecast MSD MT EPS CAGR (vs tobacco peers and wider EU Staples at M-HSD) driven by more targeted NGP investment and continued tobacco margin expansion.”
The analysts also noted: “With IMB’s valuation discounting its listless direction, the arrival of new (external) CEO Stefan Bomhard provides free optionality should he show competency and his new perspective can begin to re-build investor confidence.”
“Our FY20e/21e EPS changes by 0%/4% as incorporate improved US tobacco growth and new NGP forecasts, including £200m of impairments in H220e. We lower our Dec-21 price target to £16.50 (30% upside) underpinned by our new DCF-based valuation methodology,” they concluded.