Jefferies has downgraded Imperial Brands from 'buy' to 'hold' and slashed its price target by nearly a quarter, warning that a sharp increase in German tobacco taxes could materially slow the cigarette maker's earnings growth from next year.
The investment bank cut its target on the FTSE 100 company from 3,500p to 2,700p, a level around 6% below the current share price of 2,879p, after the German parliament voted last week to significantly increase excise duties on cigarettes between 2027 and 2030.
Jefferies estimates the changes could push the average price of a pack of cigarettes in Germany from around €8 today to more than €12 by 2030, a 50% increase that it believes will accelerate volume declines and fuel growth in the illicit trade.
Germany is Imperial Brands' second-largest market, accounting for around 15% of group operating profit, and has historically been a reliable source of steady growth thanks to a benign tax environment and gentle volume declines.
The bank said history pointed to a painful adjustment ahead, citing France, the UK, the Netherlands and Australia as examples of markets where sharp excise tax increases triggered a material acceleration in volume declines and a significant rise in illicit cigarette sales.
In France, illicit trade now accounts for 36% of total cigarette volumes, up from 16% a decade ago, while in the UK the figure has risen to 23%.
Germany's exposure is heightened by its open borders with Poland and the Czech Republic, where cigarettes typically sell for €5-7 a pack, providing a ready source of cheaper alternatives.
Jefferies now models a 13% decline in German cigarette volumes in Imperial Brands' 2027 financial year, against a previously forecast 3% fall, and warns that when the company reports its full-year 2026 results in mid-November, its guidance for 2027 could come in below current market expectations.
The bank also lowered its long-term growth assumptions for the European division and said the re-rating potential it had previously anticipated was now off the table.
