EUR 850.00 For Business Accounts Only

Morningstar | Mitsubishi Estate Still Looks Reasonably Attractive, No Change to our FVE After its 2Q Results. See Updated Analyst Note from 08 Nov 2018

We keep our fair value estimate on no-moat Mitsubishi Estate, or MEC, unchanged at JPY 2,300 after revising our cash flow forecast model. MEC's second-quarter fiscal 2019 net profit, for the period ended September 2018, of JPY 38.6 billion puts the company well on track to meet full-year guidance of JPY 123 billion. Our fair value estimate remains underpinned by the company's substantial unrealized gain in its real estate assets of JPY 3.4 trillion. However, we see earnings growth slowing to around 4% over these five years given the larger base of its portfolio. While cap rate related capital gains may plateau as global interest rates rise, we see limited downside risk at the current price level and expect the company to benefit from possible passive participation in Japan's introduction of integrated casino resorts.

MEC management indicates that they are reluctant to play an active role in Japan's potential casino developments. However, we would not be surprised to see the company be a potential local partner to an international operator assuming that MEC is comfortable with the any potential regulatory and reputation risks. In the meantime, we project earnings growth to slow to average 3.9% over the next five years from the five-year CAGR of 21.5% from 2014-2018, given the higher base. We expect growth to be driven by the addition of retail and hotel assets. The company hasn't confirmed any specific new Marunouchi area projects other than the Tokwabashi project to lift contributions post fiscal year 2021 but we anticipate more clarity in the next year. This could lift our midterm growth projections.

MEC's second-quarter income was boosted by capital gains of JPY 14 billion, up from JPY 11 billion a year ago. Nonetheless, core operating profit still posted strong year-over-year growth of 27% on a recovery in residential condo sales profits. Cumulative six months profit makes up 49% of our full-year estimate. Performance is well within market expectations.

Our no-moat rating on MEC is unchanged. The company's potential capital appreciation gains could lift its return on invested capital closer to its cost of capital but we think much of this gain sits with its Marunouchi area assets, which makes up 48% of the group's leasable office building space. We think its other assets are not moaty.