JR East Slow, Unlike Their Trains, But Steady and Attractive

Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

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Equity Bottom-Up

We're increasing our fair value estimate for East Japan Railway to JPY 11,800 from JPY 10,600 per share, representing a price to forward earnings of 16 times and an enterprise value to forward EBITDA of 9.1 times. These valuation metrics stay about 10% below its five-year historical average and stay behind the level seen among its global peers with the average price to forward earnings of 20 times and the average enterprise value to forward EBITDA of 14 times. Its shares are trading at an 11% discount to our revised valuation after underperforming TOPIX by 13% over the past year as cyclical stocks continue to outperform the benchmark during the same period. Our updated views do not affect our narrow moat rating nor our stable outlook.Investors should be aware that this firm’s unique upside potential from its "rail plus property" business model remains under appreciated, in our opinion. We like that the company continues to make solid progress on property development with a large JPY 700 billion investment for growth planned over the next three years. It also benefits from better-than-expected non-commuting passenger revenue growth with the latest revenue growth tracking above 3%. Furthermore, the company revealed that in its original reporting, it failed to capture the full scope of inbound tourist revenue and almost doubled the annual segment revenue after the restatements. Over the next three years, the company forecast that the in-bound tourist revenue will grow at a 15% CAGR to JPY 55 billion. We expect slightly stronger revenue growth with the in-bound tourist revenue growing to JPY 60 billion at an 18% CAGR. The company’s continued expansion to station-side hotels and upscale retail facilities will support additional growth opportunity above the rail industry growth rate.Japan continues to benefit from the fastest growth in international tourist arrivals among the top 20 countries at a 20% CAGR for the past four years, with the total tourist revenue reaching USD 30 billion for 2016. We expect that the current momentum can be largely sustained for the next three years in preparation for the 2020 Tokyo Olympics for which the country’s total private capital spending is set to exceed JPY 10 trillion according to the latest government estimate.Analyst: Mari Kumagai

We're increasing our fair value estimate for East Japan Railway to JPY 11,800 from JPY 10,600 per share, representing a price to forward earnings of 16 times and an enterprise value to forward EBITDA of 9.1 times. These valuation metrics stay about 10% below its five-year historical average and stay behind the level seen among its global peers with the average price to forward earnings of 20 times and the average enterprise value to forward EBITDA of 14 times. Its shares are trading at an 11% discount to our revised valuation after underperforming TOPIX by 13% over the past year as cyclical stocks continue to outperform the benchmark during the same period. Our updated views do not affect our narrow moat rating nor our stable outlook.Investors should be aware that this firm’s unique upside potential from its "rail plus property" business model remains under appreciated, in our opinion. We like that the company continues to make solid progress on property development with a large JPY 700 billion investment for growth planned over the next three years. It also benefits from better-than-expected non-commuting passenger revenue growth with the latest revenue growth tracking above 3%. Furthermore, the company revealed that in its original reporting, it failed to capture the full scope of inbound tourist revenue and almost doubled the annual segment revenue after the restatements. Over the next three years, the company forecast that the in-bound tourist revenue will grow at a 15% CAGR to JPY 55 billion. We expect slightly stronger revenue growth with the in-bound tourist revenue growing to JPY 60 billion at an 18% CAGR. The company’s continued expansion to station-side hotels and upscale retail facilities will support additional growth opportunity above the rail industry growth rate.Japan continues to benefit from the fastest growth in international tourist arrivals among the top 20 countries at a 20% CAGR for the past four years, with the total tourist revenue reaching USD 30 billion for 2016. We expect that the current momentum can be largely sustained for the next three years in preparation for the 2020 Tokyo Olympics for which the country’s total private capital spending is set to exceed JPY 10 trillion according to the latest government estimate.Analyst: Mari Kumagai

East Japan Railway: Tailwinds From Non-Traditional Railway Services, Lifting FVE to JPY 11,800

East Japan Railway Co

East Japan Railway: Tailwinds From Non-Traditional Railway Services, Lifting FVE to JPY 11,800