Continued Pricing Strength and Currency Tailwinds Lifting JT's Profits; Russia Remains a Risk

It is not surprise that wide-moat Japan Tobacco, or JT, revised up the full-year guidance thanks to continued strength in pricing effects, resilient overseas tobacco volume, in addition to favorable currency movement. The second-quarter currency-neutral sales rose 3.6% (reported 14.8% growth) year on year with adjusted operating profits (AOP) up 11.4% (reported 22% growth). The results again validate our thesis that strong pricing, a product of its moat underpinned by brand equity, will continue to lift JT’s midterm profits. On the other hand, uncertainty surrounding Russia operations remains as management continues to evaluate options for the Russia business.