Japan Tobacco Earnings: Pricing, Solid Volume, and Weak Yen Boosted Profits; Yen Reversal a Threat

Wide-moat Japan Tobacco maintained stable profit growth of 3% in the second quarter, thanks to further yen weakness and pricing strength in the EMA geographical cluster, which is composed of Russia, duty free, and markets outside Asia and Western Europe. The above-expectation pricing coupled with decreased supply chain costs has prompted management to lift its 2024 currency-neutral adjusted operating profit target by 2.3%, but it maintained the dividend of JPY 194 per share. The recent trend reversal of the yen may turn exchange rates into a headwind from the third quarter. We thus anticipate profit growth will take a breather, although our thesis that JT's pricing power will bolster midterm profit growth remains intact.