Japan Tobacco Forecast Below Estimates Amid Stalling Sales

  • Operating profit in 2016 seen largely flat at 566 billion yen
  • Company president sees negative forex impact on ruble weakness

Japan Tobacco Inc. forecast annual operating profit that fell short of analyst estimates amid weakness in the global economy, as it copes with a shrinking population and stalled domestic consumption at home.

Operating income will probably be 566 billion yen ($4.8 billion) for the year ending December 2016, little changed from a year ago, the Tokyo-based company said in a statement Thursday. That compares with the 607.8 billion yen average of 14 analyst estimates compiled by Bloomberg.

In addition to a shrinking population and falling smoking rate, Japan Tobacco faces stagnant consumption at home that prompted the country’s central bank to embark on further monetary easing last month. Uncertainties about global growth also weigh on Japan Tobacco, which derives about half of its sales from its tobacco businesses abroad.

“Consensus forecasts of real GDP in 2016 are falling in the world’s five-largest tobacco markets, which raises the risk of slowing worldwide demand for tobacco products,” Bloomberg Intelligence tobacco analyst Kenneth Shea wrote in a note Jan. 29, referring to China, Russia, the U.S., Indonesia and Japan.

These countries together account for about two-thirds of estimated 2015 global cigarette consumption, impacting companies including Japan Tobacco, Philip Morris International Inc., British American Tobacco Plc, Shea wrote.

Japan Tobacco shares have jumped 14 percent since Jan. 22, when it announced plans to raise prices of its ‘Mevius’ cigarettes. The BI Global Tobacco Competitive Peers index fell 1.2 percent in the same period.

The company, which last month acquired the rights to sell Natural American Spirit cigarettes outside the U.S., will judge whether the Mevius price hike will help boost profit “after looking at the outcome of the actual price increase,” Japan Tobacco President Mitsuomi Koizumi said in a briefing in Tokyo after the results.

Japan Tobacco expects a negative foreign exchange impact of 110 billion yen this year including on weakness in the Russian ruble, and sees the macro economy in Russia, one of Japan Tobacco’s biggest overseas market, in a “severe situation,” Koizumi said.

  • Japan Tobacco forecast 2016 net income at 399 billion yen
  • Operating income for 2015 fell 1.3 percent to 565.2 billion yen on continuing operations; net income rose 1.8 percent to 398.5 billion yen
  • 2015 revenue on continuing operations fell 0.3 percent to 2.25 trillion yen
  • Company switched to new accounting period matching calendar since 2015

The former Japanese monopoly has been buying overseas cigarette brands and expanded into electronic cigarettes as the domestic smoking rate stagnates. It agreed to buy international rights to Reynolds American Inc.’s Natural American Spirit division for about $5 billion in September, and last month said it would start selling its “Ploom TECH” tobacco vapor device in Japan.

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