West Japan Railway: Strong Earnings Underpinned by Domestic and Tourist Demand

We raise our fair value estimate for no-moat-rated West Japan Railway by 4% to JPY 5,200 per share after marginally upgrading medium-term earnings forecasts on the back of a stronger-than-expected recovery in passenger demand. For the first nine months of the fiscal year, the group generated operating revenue of JPY 1,194 billion and operating income of JPY 172 billion, up 23% and 146%, respectively, from the previous corresponding period. Management subsequently boosted full-year guidance for revenue by 3% and operating income by 14%, primarily buoyed by the mobility and retail segments on stronger passenger numbers. We forecast operating income to increase 90% for the full fiscal year, 9% next year as passenger demand normalizes, and tapering off to about 4% per year in the longer term as price increases and new investment offset population decline. The stock currently trades 21% above our intrinsic value.