IMT.L Share News (IMT)

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, according to Moody's.In a report to clients on Monday, the ratings agency, which has a stable outlook on the sector, said foreign exchange translation effects will curb operating profit growth. Moody's expects a 10 to 15% negative impact on 2015 aggregated reported operating profit for the sector mainly as a result of translation effects.Ernesto Bisagno, Moody's Vice President and Senior Analyst, said, "This will affect Philip Morris International Inc (PMI, A2 stable) and British American Tobacco (BAT, A3 stable) the most, because they have the biggest exposure to weakening currencies in developing markets."Imperial Tobacco (Baa3 negative), will be affected to a lesser extent owing 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. A significant contribution from its US business, bolstered by the strong dollar, could have a marginal positive impact for Swedish Match AB (Baa2 stable)."Bisagno also noted that recent M&A activity will keep leverage high for BAT and Imperial Tobacco.Elsewhere in the client note, Moody's forecast that volume decline in developed markets will speed up in the second half of 2015 as a result of recent price increases, despite volume contraction decreasing in the first half of the year."New legislation aimed at reducing smoking will continue to pressure the industry, although the impact of these changes may take some time to materialise," Bisagno explained.While Moody's sees increased litigation risk as a result of the 1 June Canadian court ruling against BAT, it does not expect any new large acquisitions to be announced in the next 12-18 months because the industry is highly consolidated.Most of Europe's tobacco companies also have limited capacity to accommodate additional debt-funded M&A activity and are more likely to make small bolt-on acquisitions or enter joint ventures, Bisagno concluded.