Japan Tobacco: Surprise Dividend Hike; RRP Investment and Higher Costs to Curb 2023 Profit Growth

Wide-moat Japan Tobacco's, or JT's, sizable upward guidance revision and dividend hike were the positive surprises of the third-quarter results, which included 19.3% (4.7% currency neutral) year-on-year growth in revenue and 20.7% growth (3.8% growth currency neutral) in adjusted operating profits, or AOP. The further depreciation of the yen coupled with continued strength in overseas tobacco pricing and resilience in volume are attributable to the profit upward revision. We consider some of the positive factors, such as postponed RRP (reduced risk product) investments, one-off and expect the reversed impacts will depress profits in 2023 and 2024. We have again lifted our 2022 estimates to reflect changes in our foreign exchange and volume assumptions as well as one-off income, which leaves an immaterial impact on our fair value estimate of JPY 2,800. We continue to view JT’s shares as undervalued, implying a 14% upside from the current share price.