Kyushu Railway Earnings: Recovery in Demand Underway, Reflected in Strong Performance

No-moat Kyushu Railway’s 9142 first-quarter fiscal 2024 earnings demonstrated a recovery in demand across all segments. EBITDA of JPY 21 billion was 43% more than the previous corresponding period, or PCP, with the biggest contribution from the railway business, which reported a 78% improvement in earnings. We maintain our full-year forecasts and fair value estimate of JPY 2,900 per share for Kyushu Railway, or JR Kyushu. For the remainder of fiscal 2024, we expect continued recovery in demand following the removal of pandemic restrictions for passenger trains, retail, restaurants, and hotels, in addition to incremental revenue from the new Nagasaki station, which is expected to open in the second half of fiscal 2024. At today’s prices, shares in JR Kyushu trade 7% above our fair value estimate.

Train handling revenue in the June quarter averaged 90% of pre-COVID-19 levels. We expect this will continue to trend upward over the remainder of fiscal 2024 and into fiscal 2025, as customers become more comfortable with commuting postpandemic. Nonetheless, we don’t project conventional railways to return to the passenger levels and margins experienced before COVID-19 due to headwinds from population decline and the popularity of working from home. However, we think the new Nishi-Kyushu Shinkansen will support earnings, with strong demand and high ticket prices compared with conventional lines. In the June quarter, Nishi-Kyushu passenger volumes were higher than pre-COVID-19 for a comparable express train travelling the same route. JR Kyushu has also announced price rises from October 2024. Although most base train fares are controlled by the regulator, JR Kyushu can increase prices for other train services with limited regulatory scrutiny. In this instance the firm has applied price increases of between 5% and 49% for services including sightseeing train seat reservations, commuter passes on express trains, and JR Rail passes for international tourists.