Tobacco companies' withdrawal from Russia will have a significant impact on their cash flow, at least in the short term, according to Morningstar. Still, the financial services firm believes investors are overstating the valuation impact because tobacco companies will be able to recoup some of their losses after hostilities end.
In the wake of Russia's invasion of Ukraine and western sanctions, leading multinational tobacco companies are reassessing their operations in Russia.
Philip Morris International is halting investments in Russia and plans to scale back its operations there. Bat will withdraw from Russia and transfer its Russian assets to a third party. Imperial Brands has begun talks with local third parties about the transfer of its Russian assets and operations. Japan Tobacco has halted planned investments in Russia.
Russia is the world's fourth-largest cigarette market, with a volume of nearly 206 billion cigarettes in 2020, according to Euromonitor. Japan Tobacco is the most exposed, with a 38% share of sales and nearly 16% of group tobacco sales in 2021. Philip Morris International and British American Tobacco were second with 26% and 25%, 9% and 8%, respectively. Percentage of group volume. While imperial brands are small, with an 8 per cent share, Russia accounts for 7 per cent of group sales, according to Morningstar.
According to Euromonitor, the Russian cigarette market has declined at a compound annual growth rate of 6 per cent over the past 10 years and nearly 7 per cent over the past five years. However, it has been a promising market for tobacco heating products. Morningstar estimates that by 2021, heated tobacco devices will account for 11% of the total market, making Russia one of the largest heated tobacco markets outside Asia.
Pulling out of Russia would be particularly painful for PMI, as it would jeopardise its medium-term target for IQOS HeatStick sales, according to Morningstar.
At the same time, the devaluation of the ruble will put pressure on foreign exchange conversion for all manufacturers and could further dampen an already low-margin market. Regional margins are also likely to shrink sharply in the short term. Some manufacturers have promised to keep paying their Russian and Ukrainian employees, even though revenues may be sharply reduced.