Morningstar | Mitsubishi Estate 1Q in Line, We keep our FVE at JPY 2,300
Mitsubishi Estate Co, or MEC, remains relatively attractive with first-quarter (for fiscal year ending March 2019) performance that is within our expectations. We believe the company is on track to meet our full-year earnings growth estimate of 7.6% and we leave our projections and our fair value of JPY 2,300 unchanged. We remain slightly more optimistic with our fiscal 2019 net profit forecast around 5% above management guidance on our view that MEC should be able to sustain an operating margin above 17%. MEC's recently released midterm guidance for fiscal 2020 operating income of JPY 230 billion is just 3% below our forecast so we remain comfortable with our midterm view on the company. Our no-moat rating is unchanged. At our fair value, MEC would trade on 1.8 times price/book, which is on the low end of its past 10-year range of 1.6-3.0 times. Our fair value continues to include a potential revaluation of its assets to market levels.MEC earnings should see slowing growth to the low-mid-single-digit pace, reflecting a lower-margin product mix, and as significant new capacity is not expected for another five years when its Tokiwabashi project materially contributes. However, the approval of casinos in Japan and the potential for MEC to be involved in the establishing of integrated resorts in Japan is expected to provide some excitement to the company in the near term although we don't expect the proposal/bids awards to be announced until early 2021.
First quarter net profit of JPY 25.3 billion represents a nice 41% year-over-year jump, mainly due to higher capital gains of JPY 7 billion, versus just JPY 1 billion a year ago as well as increased rents. The gains should normalize over the full year and management is guiding for no change in capital gains. Our forecast excludes non-cash charges, namely impairments, which we note could lower our forecast but would not have an impact on our fair value.
Mitsubishi Estate is a real estate company. The Building segment is engaged in the development and leasing of office buildings. The Lifestyle Property segment is engaged in the development, leasing and operation of retail properties. The Residential segment is engaged in the construction and sale of condominiums and single-family houses. The International segment is engaged in the real estate leasing and development in the U.S., U.K. and Asia. The Architectural Design & Engineering segment is engaged in the design and administration of construction and civil engineering projects. Co. also operates hotels and provides real estate investment and brokerage services.
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