Japan Tobacco: Share Price Surge

Share on facebook
Share on twitter
Share on email
Share on whatsapp
Share on linkedin

Since we noted that “in the League of Laggards to the transformation to RRPs (Altria, Imperial, JT), we clearly favor JT due its size/scale, higher emerging market exposure (supporting the combustible volume), very low indebtedness and strong focus on expanding its presence in the heated tobacco category” in Feburary 2023, Japan Tobacco (JT) has been on a tear.

In the last 12 months, JT shares have increased +49% in JPY and +29% in US$ terms. In the same period, US$/JPY plunged by 15%. Many market observers wrongly assume that weak JPY is supporting JT’s operational results. Actually, in FY23, JT reported -0.6% decline (in JPY) in operating profit in the Tobacco Segment (87% weight in revenue, 97% weight in operating profit). When adjusted for the unfavorable currency impact, operating profit was up +4.4%. Recall that JT’s international business (ex-Japan) is mostly focused on emerging markets (e.g. Russia, Turkey, Philippines, Taiwan, etc.) with currencies commonly weaker than JPY.

There are concrete reasons behind JT’s over-performance vis-a-vis its peers:
(1) Combustible growth: JT reported +2.4% volume growth in FY23 – making it the only major tobacco tobacco with growing combustible volume. In FY23, PMI, BAT, Imperial and Altria delivered -1.4%, -5.3% (-8.2% reported), -7.1% (-10.4% reported) and -9.6% volume decline, respectively, on organic basis. Moreover, JT’s Winston is closing in to take over Marlboro to become the #1 international cigarette brand. The gap between Marlboro and Winston is now down to a mere 40Bn sticks, ex-US. And, JT’s Camel is now #3 ahead of PMI’s L&M.

(2) Heated tobacco growth: In 2023, JT announced its plan to invest ¥300+Bn ($2.2Bn) in heated tobacco in the 2023-25 period – two thirds of which will be on commercialization, mainly to support geographical expansion and share gains. The objective is to be present in all major heated tobacco markets by the end of 2025 (i.e. more than ~80% of the total global volume) and in over 40 markets by the end of 2026. As a result of the expansion, JT’s year-on-year RRP volume growth increased from a dismal +3% in Q1 2023 to +23% in Q4 2023. So, the key question is: to what extent JT’s Ploom will be able to to eat into the IQOS volume & share? Our Heated Tobacco Market: 2023-2030 report answers this question among many others.

(3) Immunity to the interest rates: Unlike its peers (with 2x to 3x net debt/EBITDA leverage), JT practically has no (net) debt. Thereby, raising interest rates is less concerning for JT in terms financing costs. Moreover, despite the share price surge, JT still offers a healthy 4.7% dividend yield whereas the yield on Japanese 2-year and 5-year is 0.26% and 0.47%, respectively.

(4) Depressed valuation: Valuations are depressed for the tobacco stocks in general. However, the rise of IQOS in Japan has left such a bad mark on JT that its valuation was eroded in the 2016-22 period to a level that brought JT down to the same order of magnitude as Imperial Brands in 2022. In terms of business size & scale (volume), JT is closer to BAT and PMI – although it is not as profitable due to the much lower exposure to the US and EU.

(5) General interest in Japanese equities: The Japanese market is roaring and Nikkei 225 just surpassed the 1989 record high seen during the Japanese asset price bubble. However, not all Japanese stocks are flourishing: for instance, Sony (one of the largest companies in Japan and, presumably, the strongest Japanese brand alongside with Toyota) is well below its 2022 high. Stocks are still (somewhat) picked even in a raging bull market.

(6) Technical price momentum: Who doesn’t love “cups”?!

Call Request:
Reports

We will reach out to you within 24 hours to discuss your request. Please note that we only respond to requests with a valid business e-mail address
Disclaimer: The content in our Market Pulse section is/shall not be construed as investment advice. It is for informative purposes only and does not take into account the individual needs, investment objectives and specific financial circumstances. Any action taken upon the information in our Market Pulse section is strictly at the reader’s own risk. We assume no responsibility or liability for the actions taken. Moreover, we also assume no responsibility or liability for any errors or omissions in our content – which is provided on an “as is” basis with no guarantees of completeness, accuracy, usefulness or timeliness even if we only depend on the infromation sources that are believed to be accurate.

Consultation
Session Request

We will reach out to you within 24 hours to discuss your request. Please note that we only respond to requests with a valid business e-mail address