JR West: Initiating Coverage; Stock Screens as Overvalued

We initiate research coverage of West Japan Railway, or JR West, with a fair value estimate of JPY 5,000 per share, based on a weighted average cost of capital of 4.7%. The stock currently trades 20% above our intrinsic assessment. Forward trading multiples at current prices are relatively aggressive, such as a P/E ratio of 19 and an enterprise value/EBITDA multiple of 9.2, considering the long-term outlook is depressed by population decline. The forecast dividend yield is 1.9% based on a conservative dividend payout ratio of about 35%, as the firm retains earnings to invest in non-transport-related businesses to offset an expected decline in train usage.