According to foreign reports, Moody’s, a well-known bond rating agency, released a report that the operating profit of the global tobacco industry would rebound in 2021 after falling in 2020 and increase by 5% to 10% next year.
In a new report, the business and financial services company assessed the tobacco industry’s prospects in an unprecedented business environment. The main findings include:
The long-term impact of coronavirus on consumption is uncertain. Tobacco sales may decline as demand decreases or consumers move to lower priced products. But it can also speed up the transfer to alternative products, thus accelerating the transformation of the industry. Regulation may become more stringent, or regulators may delay the development of a regulatory framework with a higher risk ratio.
Although the dividend payout rate is very high and the economic growth slows down, the leverage ratio will continue to increase. Dividends will remain high and absorb most of the operating cash flow. But analysts at Moody’s expect the company to use free cash flow and available cash balances to repay outstanding debt.
Operating profit declined in 2020, but rebounded in 2021, maintaining a stable outlook. Despite the increased uncertainty caused by the coronavirus pandemic, analysts at Moody’s expect demand to remain fairly stable over the next two years. Some modest risks include lower tax-free sales, slower conversion of adult smokers to alternative products, disruption of manufacturing and supply chains, and increased currency volatility.
Cigarette sales continued to decline, but higher prices offset the impact. In the next 12-18 months, sales of traditional cigarettes in the United States will fall by 5-6%, and in the rest of the world (excluding China) by 2-3%. But the median single digit price increase will continue, which will offset the decline in sales.
Despite the attention of more regulators, sales of alternative products will continue to grow. Analysts at Moody’s expect sales growth for alternative products to slow this year, but gradually return to 2021. The market share of alternative products will remain stable in the short term, because the strict regulatory review of e-cigarettes and the temporary closure of iqos stores during the lock-in period may affect user access. Increasingly stringent regulation will create barriers for entrants and for the consolidation of existing market positions.