Pricing Strength and Weak Yen Lifting Japan Tobacco's Profits; Eased Russian Competition Favorable

Wide-moat Japan Tobacco, or JT, beat its full-year profit guidance and our estimates, thanks to favorable currency movement. The results again reinforce our thesis that pricing will sustain JT’s profits and margins. To our surprise, management guides for flat adjusted operating profits (currency neutral) or a 6.4% decline in operating profits on a reporting basis for 2023 despite a high comp and exchange rate uncertainty. We have raised our fair value estimate to JPY 3,200 from JPY 2,800 after adjusting our foreign exchange assumptions and rolling the forecasts to 2023. While our new intrinsic value indicates 18% upside, currency movement, the Russia ruble in particular, will be a key swing factor to its near-term profits. Over the long run, the growth prospects of reduced risk products, or RRPs, especially in the lucrative home market and Russia, remain most critical to its profit and dividend outlooks.