Morningstar | JRC Posts Better-than-Expected 1Q Growth, Our FVE Raised to JPY 23,800
Narrow-moat Central Japan Railway, or JRC, posted better-than-expected first quarter (for financial year ending 2019) results with growth and margins ahead of our full-year assumptions. Operating income growth of 7.2% year over year is impressive with costs well contained leading to operating margin expanding to 190 basis points to 43.6% from a year ago. However, this is a seasonally stronger quarter for JRC normally making up 30% of full-year income, and we make only minor adjustments to our near-term forecasts. Real estate profit improved, probably helped by sales of its Central Garden Residence project but this doesn't move the needle much. Nonetheless, our fair value estimate rises to JPY 23,800 to reflect an uptick in our longer-term assumptions. We think JRC remains fairly valued.Compared with JR East, JRC derives a much more significant 95% of its operating income (versus 70% for JR East) from its rail operations and enjoys a fairly high level of efficiency with its transportation segment operating margin at 44% compared with JR East's 16%. We believe JRC's Nozomi shinkansen line should also be able to benefit from rising tourism to cities such as Kyoto, Nara, and Osaka which may help prolong growth for its rail lines. As a result, we assume that its rail segment growth will slow but remain positive at just over 1% during our explicit 10-year forecast period. In contrast, we forecast JR East's rail segment growth to slow to zero over the same period.
However, JRC will still be relatively more sensitive to demographic headwinds that JR East has highlighted will start to impede growth in its rail operations in the next 20 years. JRC is planning to increase its commercial facilities services to offset the risk of declining efficiency on its rail assets over time. In addition, the company is looking into overseas rail projects but we think that unless project ownership or acquisitions are possible, this may not move the needle much.
Central Japan Railway is engaged in the provision of railway services in Tokai region. As of Mar 31 2018, Co. operates 13 railway lines, 405 railway stations, and 4,840 rolling stocks. The Core of Co.'s operations is the Tokaido Shinkansen, the main transportation artery linking Japan's principal metropolitan areas of Tokyo, Nagoya, and Osaka, as well as conventional lines. Co. is also engaged in the operation of department stores, the sale of foods and beverages in the trains and stations, the lease and sale of real estate, the operations of hotels, and the provision of travel agency and advertising agency services, as well as facility inspection and maintenance services.
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