Robust Pricing Lifts Japan Tobacco's Profits; Russia Business Outlook and Dividends Remain Uncertain

Wide-moat Japan Tobacco’s first-quarter results came in above our expectations and seem somewhat better than the company’s internal targets thanks to continued pricing strength and yen weakness against the U.S. dollar. Currency-neutral core revenue grew 3.8% (reported 6.2%) while adjusted operating profits (AOP) rose 4.5% (reported 9.4%). Pricing remains the key profit driver during the quarter, echoing our investment thesis that the firm’s ability to take pricing will bolster its midterm profit growth. Management intends to review the full-year guidance after gaining better visibility into impacts of the war in Ukraine, likely at the interim results or later. We have made no change in our forecasts, of which our 2022 operating profit estimate is 24% below the current guidance. We continue to view the shares as undervalued, indicating 12% upside to our intrinsic value of JPY 2,500.