Japan Tobacco Earnings: Pricing Stayed Resilient; RRP Share Marched Amid Fierce Price Competition

Wide-moat Japan Tobacco, or JT, again raised its sales and profit guidance thanks to better-than-expected tobacco volume and profits of the nontobacco businesses and real estate divestiture, as well as a sizable drop in trademark amortization. Continued strength in tobacco pricing has reaffirmed our investment thesis that pricing will remain the key profit growth engine to back dividend hikes. We have maintained the tobacco top-line growth assumption but again lifted our profit estimates to reflect reduced amortization assumptions as well as increased one-off profits of the property divestiture. While the adjustments leave an immaterial impact on our free cash flow projection, we marginally raise our fair value estimate to JPY 3,300 from JPY 3,200 after incorporating increased time value of money. After the recent rally, we view shares as modestly overvalued.