Better-than-Expected Business Expansion from Property Developments, Lifting JRW’s FVE to JPY 8,200

We are increasing the fair value estimate of West Japan Railway, or JRW, to JPY 8,200 per share from JPY 7,200 per share previously, representing an attractive price/forward earnings of 14 times and an enterprise value/forward EBITDA of 7.4 times. We have incorporated a better-than-expected growth of new property developments after the 70% ownership purchase of Mitsubishi Heavy Industry’s real estate division for JPY 100 billion, lifting the real estate segment revenue, net of amortization and tax effects, as much as 18% or JPY 3.2 billion for fiscal 2017. In our view, the deal which was announced in the previous quarter, appears attractively priced with a price/EBITDA multiple of less than 5 times after accounting for large tax benefits. We like that management plans to limit new capital spending on scheduled business expansion utilizing the former Mitsubishi Heavy Industry’s real estate division. Leveraging JRW’s high brand equity as a former government-owned entity, the new business will benefit from reduced market expense, minimal cost of funding, and higher operating margin relative to its smaller peers.