Company Reports

West Japan Railway, or JR West, is the main railway operator in western Honshu, headquartered in Osaka. Two-thirds of prepandemic operating income was from rail services, close to 20% from real estate, 10% from travel agency services and hotels, and 3% from retail operations. Rail services include long-distance bullet train lines, known as Shinkansen, and conventional train lines in the Kyoto-Osaka-Kobe metropolitan area and in regional areas.

No-moat-rated JR West’s recovery was stronger than expected, with operating income in the year to March 31, 2024 (fiscal 2024) doubling to JPY 180 billion, ahead of prior guidance and our forecast of JPY 160 billion. On the back of the strong recovery, management upgraded its fiscal 2028 operating income target by 5% to JPY 195 billion. We upgrade our forecasts by a similar amount and lift our fair value estimate 8% to JPY 2,800 per share. We consider the stock slightly overvalued at current prices. It offers a forward dividend yield of 2.3%, though with limited upside to earnings over the long term due to population decline.

West Japan Railway, or JR West, is the main railway operator in western Honshu, headquartered in Osaka. Two-thirds of prepandemic operating income was from rail services, close to 20% from real estate, 10% from travel agency services and hotels, and 3% from retail operations. Rail services include long-distance bullet train lines, known as Shinkansen, and conventional train lines in the Kyoto-Osaka-Kobe metropolitan area and in regional areas.

West Japan Railway, or JR West, is the main railway operator in western Honshu, headquartered in Osaka. Two-thirds of prepandemic operating income was from rail services, close to 20% from real estate, 10% from travel agency services and hotels, and 3% from retail operations. Rail services include long-distance bullet train lines, known as Shinkansen, and conventional train lines in the Kyoto-Osaka-Kobe metropolitan area and in regional areas.

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.

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.

West Japan Railway, or JR West, is the main railway operator in western Honshu, headquartered in Osaka. Two-thirds of prepandemic operating income was from rail services, close to 20% from real estate, 10% from travel agency services and hotels, and 3% from retail operations. Rail services include long-distance bullet train lines, known as Shinkansen, and conventional train lines in the Kyoto-Osaka-Kobe metropolitan area and in regional areas.

We are dropping analyst coverage of West Japan Railway. We provide broad coverage of more than 1,500 companies across more than 90 industry groups and adjust our coverage as necessary based on client demand and investor interest.

We are placing West Japan Railway under review as we transfer coverage to a new analyst. We expect to publish a new fair value estimate by Sept. 30, 2018.

We are increasing our fair value estimate for West Japan Railway, or JRW, to JPY 8,400 per share from JPY 8,200 to reflect the time value of money. Our fundamental view of the name is unchanged after a series of major safety incidents confirming the company’s weak corporate governance, which we have previously highlighted. The shares currently appear slightly overvalued versus our fair value estimate, reflecting our more cautious views on JRW's safety investment requirements and rising hotel investments over the next five years. We reaffirm our no-moat and stable moat trend ratings.

Japan’s comprehensive national railway routes are dominated by six former national railway operators of which West Japan Railway, or JRW, ranks as the third largest. JRW provides both conventional and high-speed bullet railway, or Shinkansen, along the routes in and linked to the western section of Japan. As its service area tends to have smaller urban centers relative to the east, JRW has found it more challenging than its larger peers to produce excess returns. Despite decent recurring cash flows, JRW’s inability to consistently outearn its cost of capital leaves us with a no-moat rating on the company.

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.

The first quarter results for Japan’s three largest passenger railway companies did not contain any surprises. The shares appear slightly undervalued after we have incorporated upsides emerging from additional tourist demand for East Japan Railway, or JRE, and West Japan Railway, or JRW. During the quarter, Central Japan Railway, or JRC, announced they have completed the second leg of the JPY 3 trillion government loan package at a minimal coupon rate of 1.0% (versus the comparable market rate of 0.86%) for the next 30 years, without affecting our earnings estimates during our forecast horizon. We maintain our fair value estimates for the three companies under our coverage with no change to our narrow moat ratings with stable moat trends after the results.

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.

Japan’s comprehensive national railway routes are dominated by six former national railway operators of which West Japan Railway, or JRW, ranks as the third-largest. As its name denotes, JRW provides both conventional and high-speed bullet railway, or Shinkansen, along the routes in and linked to the western section of Japan. As its service area tends to have smaller urban centers relative to the east, JRW has found it more challenging than its larger peers to find excess returns. Despite decent recurring cash flows, JRW’s inability to consistently outearn its cost of capital leaves us with a no-moat rating on the company.

West Japan Railway's, or JRW’s, fiscal 2016 result was in line, with net profit increasing 6.3% year over year to JPY 91.2 billion on net revenue falling 0.7% year over year for the first time in seven years. For the year ended March 2017, the mainstay railway operations reported no growth due to declining rural population, underperforming underlying domestic demand growing by 0.5%. We continue to have structural concerns over JRW's larger service territory in rural areas as the company expects to charge more abolition charges in loss-making railway routes. The latest charge for the year ended reached JPY 11.4 billion, above our annual average forecast of JPY 5 billion. Management forecasts fiscal 2017 results to improve strongly with net profits increasing by 17.2% year on year, and with net revenue increasing by 3.5% year on year. Its strong bottom line improvement forecasts largely relate to: (1) a sequential rebound from the Kumamoto earthquake; and (2) management’s rather optimistic assessment on its new property development subsidiary, acquired in cash for JPY 97 billion.

Japan’s comprehensive national railway routes are dominated by six former national railway operators of which West Japan Railway, or JRW, ranks as the third-largest. As its name denotes, JRW provides both conventional and high-speed bullet railway, or Shinkansen, along the routes in and linked to the western section of Japan. As its service area tends to have smaller urban centers relative to the east, JRW has found it more challenging than its larger peers to find excess returns. Despite decent recurring cash flows, JRW’s inability to consistently outearn its cost of capital leaves us with a no-moat rating on the company.

We are increasing our fair value estimate for West Japan Railway, or JRW, to JPY 7,200 per share from JPY 6,600 per share previously. Shares are trading at a minimal discount to our revised fair value estimate after incorporating better-than-expected growth in incoming tourist demand tracking around mid-6%. With revenue increasing from opening of Hokuriku Shinkansen during the year, we expect West Japan Railway to report a respectable 22% increase in net profit to JPY 105 billion for the full year ending March 2017, with results set to be released on April 27, 2017. We also do not assume any major expenditure for the rest of the year after the company completes the 70% ownership purchase of Mitsubishi Heavy Industry’s real estate division for JPY 100 billion. Looking ahead, improving free cash flow yields could provide some upside to its low dividend yields, as management has already signaled its intention to enhance total shareholder returns above a reasonably attractive 3%.

West Japan Railway, or JRW, is taking a 70% stake in Mitsubishi Heavy Industry’s real estate business for JPY 97 billion, net of the transaction fee. The deal will boost JRW’s total real estate holdings by 10% to JPY 480 billion, or 20% of consolidated assets as of the end of September 2016. The move is somewhat surprising, given that the newly acquired assets are largely residential properties located in the Greater Tokyo Metropolitan, or GTM, area, whereas JRW’s main asset base remains within the service territory of Western Japan.

Japan’s comprehensive national railway routes are dominated by six former national railway operators of which West Japan Railway, or JRW, ranks as the third-largest. As its name denotes, JRW provides both conventional and high-speed bullet railway, or Shinkansen, along the routes in and linked to the western section of Japan. As its service area tends to have smaller urban centers relative to the east, JRW has found it more challenging than its larger peers to find excess returns. Despite decent recurring cash flows, JRW’s inability to consistently outearn its cost of capital leaves us with a no-moat rating on the company as a result .