Moody’s has published its outlook for European tobacco companies, which forecasts that operating profit could improve over the next 12-18 months to 4.0%-5.0% from 2.5%-3.5% in late 2014 (excluding foreign exchange effects). However, it still remains within the range for a stable outlook.

“Tobacco companies’ underlying business model remains strong and the suspension of share buybacks will help alleviate the pressure on leverage resulting from ongoing foreign exchange volatility”, said Ernesto Bisagno, Moody’s Vice President and Senior Analyst. “However we expect that recent M&A activity will keep leverage high for British American Tobacco and Imperial Tobacco”, added Mr Bisagno.

Key messages:
Foreign exchange translation effects will curb operating profit growth. We expect a negative impact on 2015 aggregated reported operating profit for the sector between 10%-15% mainly as a result of translation effects. This will affect Philip Morris International Inc and BAT the most, because they have the biggest exposure to weakening currencies in developing markets, Imperial to a lesser extent due to the weaker euro. However Imperial and BAT may also benefit from the dollar’s strength in the next 12-18 months thanks to their involvement in the recent Reynolds-Lorillard transaction. (www.internationalsupermarketnews.com)