JRW's First-Half Results in Line, but Less Attractive Than Its Peers With Few Catalysts in Sight

West Japan Railway's, or JRW’s, first-half result contained no surprises, with net profit increasing 18.8% (against our forecast of 16.1%) year over year to JPY 67.8 billion on net revenue increasing 3.8% (against our forecast of 3.4%) year over year. Management remains on track to achieve the fiscal 2017 forecast, with net profits increasing by 21% year on year and net revenue increasing by 3.9% year on year. For the six months ended September 2017, the company benefited from higher growth than its peers, partly due to a sequential rebound from the Kumamoto earthquake and the acquisition of the former Mitsubishi Heavy Industry’s real estate division. Excluding these temporary impacts, its underlying operations, which face more competition for a less affluent customer base, continue to report less impressive returns than its two immediate peers in all segments. We also expect that higher maintenance charges on its older railway infrastructure will likely weigh down the results, slowing the margin expansion relative to its peers in outer years. The results do not affect our no-moat rating and stable moat trend rating. After adjusting for slight uptick in transportation demand, together with an expected maintenance cost increase, our fair value estimate is unchanged. We do not see any upside to the shares at the current level.