Japan Tobacco Earnings: Solid Growth Lifted by Pricing, Volume, and Weak Yen

Wide-moat Japan Tobacco, or JT, was off to a good start with the first-quarter results exceeding our expectations and the company’s internal targets thanks to solid volume growth and strong pricing in addition to yen weakness. Currency-neutral core revenue grew 6.3% (15.3% reported) while adjusted operating profit rose 4.6% (reported 14.1% growth). Pricing remained the key profit driver during the quarter, echoing our investment thesis that JT’s ability to take pricing will bolster its midterm profit growth. Despite better-than-expected first-quarter earnings, with currency likely turning into a headwind and investment on the rollout of heated tobacco sticks, or HTS, rising from the second quarter, we have made no change in our forecasts of which our 2023 profit estimates are a touch below the guidance. After the recent rally possibly prompted by investors’ increasing appetite for defensive names, we view shares as modestly undervalued, indicating 9% upside to our fair value estimate of JPY 3,200.