Morningstar | Lowering JR East's Long-Term Rail Assumptions, FVE Reduced to JPY 11,500. See Updated Analyst Note from 29 Jul 2018
JR East's first quarter (for financial year ending March 2019) rail operations were in line with our assumptions and there are no signs that the company will have any difficulty in meeting its full year net profit target of JPY 289 million.  However, we lower our fair value estimate to JPY 11,500 from JPY 11,800 to reflect slower growth post-Olympics in line with the company's recent 2027 strategy plan. The company expects demographic headwinds and the introduction of autonomous vehicle rideshare programs to slow rail demand and is focusing on growing its non-rail activities. As a result, it expects rail operations to make up 60% of its total revenue in 10 years’ time, down from 70% currently. Our narrow moat rating is intact as we think there will be opportunities for the company to find ways to sustain its competitive advantages, especially with its key position in Tokyo.We have lengthened our explicit forecast period by five years to 2027 to reflect the company's 10-year targets and our assumptions lead to the rail segment making up 63% of operating income in 2027. Growth in its non-rail activities at 3-5% will exceed that of the rail segment, which we factor will ease to zero. JR East’s non-rail activities include its commercial facilities in its stations and a planned drive to make its Suica card an available payment point for more services.
First-quarter operations show both its retail & commercial services and real estate segments growing just north of 3% year on year, which is in line with our full-year assumption, while its others activities, which includes Suica, were up almost 8%. The latter is slightly shy of our 9% full-year growth assumption. But first-quarter net profit was down 9% year over year to JPY 78 billion due to a rise in one-off losses related to a reduction in construction grants. This number is volatile from year to year, timed with its Shinkansen expansions. The inclusion of these expenses lowers our profit forecasts by around 2%.
East Japan Railway is mainly engaged in the transportation business. Co. operates railway routes covering mainly in the Kanto area and the Tohoku area totaling of 7,457.3 km of railway with 1,665 stations, 11,506 standard rolling stocks and 1,370 bullet Train rolling stocks as of Mar 31 2017. Co. establishes commercial space in the railway stations and operates restaurants, retail stores, cafes, convenience stores and shopping centers; and leases office buildings located in the railway stations and surrounding areas. Co. is also engaged in hotel business, advertising agency, travel operations, wholesale, truck delivery, information processing, cleaning, as well as credit card business.
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