Tobacco companies’ retreat from Russia will materially impact their cash flows, at least in the short term, according to Morningstar. Nonetheless, the financial services company believes investors have overstated the valuation impact as the tobacco companies will be able to recoup some their losses after hostilities end.
Following Russia’s invasion of Ukraine and the imposition of sanctions by Western countries, the leading multinational tobacco companies have all reevaluated their operations in Russia.
Philip Morris International ceased investment in Russia and plans to scale down its business there. BAT will exit Russia and transfer its Russian assets to a third party. Imperial Brands has begun negotiations with a local third party about a transfer of its Russian assets and operations. Japan Tobacco has ceased planned investment in Russia.
Russia is the world’s fourth-largest cigarette market, with market volume of almost 206 billion sticks in 2020, according to Euromonitor. Japan Tobacco is the most exposed with a volume share of 38 percent, representing almost 16 percent of group tobacco volume in 2021. Philip Morris International and BAT are the next largest with shares of 26 percent and 25 percent, respectively, representing 9 percent and 8 percent of group volume. Although Imperial Brands is smaller, with only 8 percent share, Russia represents 7 percent of group volume, according to Morningstar.
The Russian cigarette market has been declining at a 6 percent compound annual rate over the past 10 years and almost 7 percent over the past five years, according to Euromonitor. However, it has been a promising market for tobacco-heating products. Morningstar estimates that heated-tobacco units accounted for 11 percent of the total market in 2021, making Russia one of the largest markets for heated-tobacco outside Asia.
Exiting Russia would be especially painful for PMI because it would jeopardize its medium-term targets for IQOS HeatStick sales, according to Morningstar
Meanwhile, the collapse in the ruble will create translational foreign exchange pressure for all manufacturers and is likely to make an already low-margin market even lower. Regional margins are also likely to contract materially in the near term. Some manufacturers have pledged to continue paying the salaries of employees in Russia and Ukraine even as revenue will probably be decimated.