Highlights from this week’s Investors Chronicle

Buy: LondonMetric Property (LMP)

Despite a premium to forecast net asset value, the development pipeline and attractive dividend maintains the shares’ attraction, writes Jonas Crosland.

LondonMetric Property delivered a solid performance in the year to March this year, with a £118m revaluation surplus helping to boost adjusted net asset value by 16 per cent.

Shareholders were also rewarded with a 2p special dividend, funded from disposal gains on the Carter Lane office redevelopment, the last of its London offices.

The group has made strides repositioning its portfolio to concentrate on distribution warehouses and convenience shopping. These now make up 90 per cent of the £1.4bn portfolio, while exposure to residential and office assets has been reduced to just 10 per cent from 45 per cent in 2013.

In shifting this emphasis, the group has made disposals of £289m at a net initial yield of 5.2 per cent, while acquiring new assets totalling £309m at 6.2 per cent. Net rental income grew by just over a fifth, driven by acquisitions in the previous year. Rental income lost as a result of disposals was mostly offset by income generated by new assets.

Further income will come from the 2m sq ft under development. There is also a conditional development pipeline of 1.1m sq ft, including a 37-acre site close to the M1. For this, the group reports strong retailer interest, and planning consent could be secured later this year.

Group finances remain in good shape, and while net debt rose by £114m to £499m, the strong valuation uplift meant that the loan-to-value ratio remained a comfortable 36 per cent, up from 32 per cent.

Sell: AO World (AO.)

The group’s problems — notably the lack of any obvious competitive advantage — run deeper than disappointing results, writes Harriet Russell.

A shoddy set of full-year results should not surprise shareholders in white goods e-tailer AO World.

The group issued a profit warning in February after a bout of poor trading, guiding analysts to expect UK sales of £470m to £475m for the year to March, compared with the previous consensus of £486m.

Sure enough, the group reported UK sales of £471m last year, while adjusted operating profits came in at £12.7m (from £8.4m in 2014). The numbers were in line with guidance, but the market was still disappointed, sending the shares down 3.5 per cent on Tuesday.

But AO World’s domestic performance looked positively robust compared with that of the new European business. The group launched its first German website last October and reported initial revenues of £5.8m by the end of the financial year. But £4.2m in set-up costs and escalating trading losses led to an overall deficit of £12.3m on the continent.

That does not seem to have deterred AO’s bosses, who hinted at another European launch during the first half of 2016.

Overall, the group turned in adjusted operating losses of £2.2m, compared with a profit of £8.2m for the year to March 2014. The reported figures for the previous year were skewed by £15.4m of IPO costs.

Broker Numis Securities expects losses of £4.7m for the current financial year, compared with adjusted pre-tax profits of £1.6m for full-year 2015.

Hold: Tate & Lyle (TATE)

The stock trades on 16 times forward earnings, which suggests recovery potential is priced in for now, writes Harriet Russell.

The past trading year has been tough for ingredients giant Tate & Lyle, but it is confident it can turn the corner this year by focusing on special food ingredients rather than its bulk business.

In the meantime, the board has ensured that the shares find support by increasing the dividend to 28p, keeping the yield hovering around 5 per cent. It says it can afford to maintain the dividend at 28p a share for the 2017 year-end — a valid concern for investors after net debt jumped from £353m to £504m in the 12 months to the end of March.

The increase was down to a combination of lower earnings, investment in the special food ingredients division and existing dividend commitments. Tate also had to contend with a negative currency impact of £46m.

The group has agreed to exit its European bulk ingredients joint venture with Archer Daniels Midland Company — netting €240m (£172m) in the process — and will concentrate, instead, on expanding into potentially more lucrative speciality food ingredients.

Commodity prices — specifically sugar — have been hitting the company hard. Tate’s Splenda sucralose division struggled last year, with adjusted operating profits down 73 per cent at just £16m. But this part of the business will be streamlined over the coming years and manufacturing centralised into a single production facility in Alabama from early 2016.

Consensus estimates put earnings per share at 36.8p for the current financial year, compared with 36.1p in the year to March 2015.

Sector focus: tobacco

British American Tobacco published a gargantuan number this week: C$15.6bn (£8.2bn), writes Stephen Wilmot. This is the amount awarded to smokers by a Canadian court for “moral and punitive damages”. BAT’s subsidiary is liable for two-thirds of the sum.

Shareholders need not fret yet: the legal battle has already been rumbling on for 10 years, and the ruling will be challenged. Public smoking bans and tax increases introduced in countries ranging from Brazil through the Philippines to Turkey are of more immediate consequence.

Manufacturers used to rely on emerging markets to offset falling volumes in Europe and North America, but this growth engine has stalled.

The latest government crackdown is in China, the world’s largest cigarette market, where Beijing has banned smoking in restaurants, public transport and offices. The direct impact on BAT and Imperial Tobacco will be limited, as the Chinese market is virtually monopolised by China National Tobacco Corporation, but the move highlights the trend across the developing world.

The fascinating thing about tobacco companies is how successfully they have managed decline.

In 2006, BAT sold 691bn cigarettes and was worth £29.6bn on New Year’s Eve. In 2014, it sold 667bn and attracted a year-end market valuation of £65.2bn. Imperial Tobacco shows the same pattern. This is a very instructive contradiction.

Tobacco groups have wrung growth from a shrinking market in three ways. Firstly and most importantly, they have continually increased prices. This has worked because demand for cigarettes is infamously “inelastic”: consumers pay up even if prices rise.

There is a parallel with the big brewers, notably SABMiller. Investors need not be too concerned by flat volumes, because consumers pay up for beer. SAB’s lager volumes showed no underlying growth in the year to March 31, but the company still delivered organic top-line growth of 5 per cent.

The second key strategy for countering industry decline is consolidation. The most recent mega deal is the acquisition of Lorillard, the number three cigarette group in the US, by Reynolds, the number two. To placate the antitrust authorities, the companies agreed to sell brands to Imperial, the number four.

Such deals are a vehicle for profit boosting cost-cutting. Thanks to cost savings, the operating margin in Imperial’s tobacco business reached 44 per cent in the six months to March.

Finally, cigarette companies have been buying into new technology. In 2013, BAT launched the UK’s first ecigarette brand, Vype, while the Reynolds-Lorillard merger will bring Imperial a rival brand, blu. Here the parallel is with the oil majors and their flirtations with clean energy.

Cigarette and oil alternatives make headlines, but they are a very long way from paying for the dividends that have long underpinned the investment case for Britain’s largest companies. The lesson of big tobacco is that decline can be managed successfully for much longer than one might think.