Raising Central Japan Railway FVE to JPY 24,000 on Robust Shinkansen Revenue; Shares Fully Valued

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.