Reducing Japan Tobacco's FVE to Reflect Risks Associated With Ukraine War; Shares Still Undervalued

We have reduced wide-moat Japan Tobacco's fair value estimate to JPY 2,500 from JPY 2,800 following recent developments of Russia’s invasion of Ukraine. Russia, Japan Tobacco’s largest overseas market, represents an estimated 12% of group revenue and 18% of the group’s adjusted operating profits, or AOP, as of 2021. Japan Tobacco also holds a leading position with 36.7% volume share in the market as of 2021. Thus, the impact of the Russia-Ukraine war on Japan Tobacco is more notable than it is on the other Big Tobacco firms. The war is no doubt detrimental to the near-term business prospects of Russia and the region, but Japan Tobacco is unlikely to withdraw unless its long-term profitability is critically undermined. We believe reduced risk product, RRP, growth will remain a key swing factor to its midterm profitability and continue to view shares as undervalued, indicating 24% upside to the updated intrinsic value.