Morningstar | Raising Central Japan Railway FVE to JPY 24,000 on Robust Shinkansen Revenue; Shares Fully Valued. See Updated Analyst Note from 31 Jan 2019
We raise our fair value estimate for narrow-moat-rated Central Japan Railway to JPY 24,000 per share from JPY 20,500, underpinned by our increased conviction in the long-term growth outlook for the Tokaido Shinkansen. Continuing its strong fiscal first-half momentum, JRC’s third quarter (for the fiscal year ending March 2019) showed solid performance, with revenue up 3.1% year over year on robust transportation revenue growth of 3.2% and overall operating margin continuing its improvement over the year-ago level on better operating leverage. The merchandise business, which accounts for 14% of sales, also posted healthy growth of 4.8%, driven by mid-single digit sales growth at JR Nagoya Takashimaya and Gate Tower Mall. We believe management’s full-year forecast of JPY 1,443 billion for the transportation segment, which accounts for 78% of overall revenue, is conservative, as the segment’s revenue growth in the first nine months of fiscal 2019 is trending above guidance and monthly passenger volume remains robust. We have adjusted the segment’s full-year revenue growth to 2.2% versus 1.3% previously and overall operating income to JPY 693 billion versus JPY 671 billion previously.
While uncertainty around the multidecade Chuo Shinkansen project remains, we are optimistic on the outlook for the transportation segment, which drives 95% of overall operating profit, between now and fiscal 2028, supported by resilient long-term sales growth on the Tokaido Shinkansen. We have revised our transportation revenue compound annual growth rate to 1.8% from 0.9% between now and fiscal 2027, underpinned by long-term real GDP growth of 1.0%-1.5%, continued initiatives to boost transportation capacity, especially during peak periods, and enhanced operational efficiency, led by the growth of online ticket reservations and the full-scale rollout of the natural disaster-resilient N700S rolling stock in fiscal 2020.
In fiscal 2014, JRC began the 10 Nozomi Timetable initiative, which seeks to operate up to 10 Nozomi services (in both directions) per hour. Between fiscal 2014 and fiscal 2018, the aggregate number of daily Nozomi services expanded to 368 from 342. JRC also operates extra train services during peak periods and hours. JRC’s enhanced transportation capacity has resulted in fewer bottleneck issues, while annual passenger volume on the Tokaido Shinkansen has steadily increased from 149 million in fiscal 2014 to 170 million in fiscal 2018. The capacity utilization rate has grown from 94% to 96% during the same period.
Online reservation services via SmartEx (mainly for foreign visitors) and Express (mainly for domestic members) platforms currently account for more than 30% of all seat reservations and continue to see steady growth. JRC is planning to increasingly shift its ticket sales system from over the counter to online reservations and ticketless boarding. We believe this will contribute to a reduction in travelling time for commuters. Separately, JRC plans to introduce the N700S rolling stock to its Shinkansen fleet in spring 2020. The N700S uses a new “battery-based self-running†technology, which enables it to evacuate from inside a tunnel in the event of a multihour power outage caused by natural disasters. We believe these initiatives strengthen the overall operational efficiency of Tokaido Shinkansen.