Company Reports

Kyushu Railway, or JR Kyushu, is focused on driving a recovery of its businesses following the covid-19 pandemic. But there are structural headwinds, including a declining and aging population. In addition, train travel in Kyushu is less popular than other more densely populated and congested areas in Japan. Cars are a viable alternative, with around 60% of the island’s occupants owning a private vehicle. We expect greater earnings growth in the nonrailway segments, which have surpassed transportation earnings since fiscal 2021, driven by the pandemic hit on rail passenger numbers as well as investments in non-rail segments. We forecast the nonrailway segments to contribute about three-fourths of group earnings by fiscal 2028 from about 40% prepandemic.

No-moat Kyushu Railway’s results in the quarter ending June 2024 were broadly in line with our expectations. An ongoing rebound in travel and consumption demand continues to buoy growth in transportation, hotels, and retail and restaurants. Management reaffirmed full-year forecasts and annual dividend guidance of JPY 93 per share.

No-moat Kyushu Railway’s full-year results were slightly stronger than we expected, reporting EBIT of JPY 47 billion, up 37% year on year. All segments reported positive performances for the fiscal year ending March 31, 2024 (fiscal 2024). In particular, the transportation, real estate and hotels, and retail and restaurant segments enjoyed robust demand recovery. Management expects to meet its medium-term business plan targets, increasing EBIT by 22% to JPY 57 billion, in fiscal 2025. In line with management's guidance, we lowered our fiscal 2025 EBIT forecast by 10%; however, our longer-term estimates are unchanged.

Kyushu Railway, or JR Kyushu, is focused on driving a recovery of its businesses following the covid-19 pandemic. But there are structural headwinds, including a declining and aging population. In addition, train travel in Kyushu is less popular than other more densely populated and congested areas in Japan. Cars are a viable alternative, with around 60% of the island’s occupants owning a private vehicle. We expect greater earnings growth in the nonrailway segments, which have surpassed transportation earnings since fiscal 2021, driven by the pandemic hit on rail passenger numbers as well as investments in non-rail segments. We forecast the nonrailway segments to contribute about three-fourths of group earnings by fiscal 2028 from about 40% prepandemic.

We maintain our fair value estimate for no-moat-rated Kyushu Railway at JPY 2,900 per share, following the release of third-quarter results. For the nine months ending Dec. 31, 2023, EBIT soared 92% to JPY 43 billion compared with the previous corresponding period, as demand recovered following the pandemic lockdowns. Management reaffirmed full-year guidance for EBIT to improve by 33%, implying a weak fourth quarter that management says is because of higher maintenance and operating costs. We leave our near-term forecasts unchanged, broadly in line with company guidance. The stock trades 15% above our fair value estimate, screening as overvalued.

Kyushu Railway, or JR Kyushu, is focused on driving a recovery of its businesses following the COVID-19 pandemic. But there are structural headwinds, including a declining and aging population. In addition, train travel in Kyushu is less popular than other more densely populated and congested areas in Japan. Cars are a viable alternative, with around 60% of the island’s occupants owning a private vehicle. We expect greater earnings growth in the nonrailway segments, which have surpassed transportation earnings since fiscal 2021, driven by the pandemic hit on rail passenger numbers as well as investments in non-rail segments. We forecast the nonrailway segments to contribute about three-fourths of group earnings by fiscal 2028 from about 40% prepandemic.

We maintain our fair value estimate for no-moat Kyushu Railway at JPY 2,900 following its strong half-year results. Management reconfirmed fiscal 2024 guidance for revenue to advance 9% to JPY 417 billion and EBIT to expand 27% to JPY 46 billion in fiscal 2024. While earnings are recovering strongly following the pandemic, we think headwinds will intensify over the longer term as population decline accelerates. The stock screens as marginally overvalued at present.

No-moat Kyushu Railway’s first-quarter fiscal 2024 earnings demonstrated a recovery in demand across all segments. EBITDA of JPY 21 billion was 43% more than the previous corresponding period, or PCP, with the biggest contribution from the railway business, which reported a 78% improvement in earnings. We maintain our full-year forecasts and fair value estimate of JPY 2,900 per share for Kyushu Railway, or JR Kyushu. For the remainder of fiscal 2024, we expect continued recovery in demand following the removal of pandemic restrictions for passenger trains, retail, restaurants, and hotels, in addition to incremental revenue from the new Nagasaki station, which is expected to open in the second half of fiscal 2024. At today’s prices, shares in JR Kyushu trade 7% above our fair value estimate.

Kyushu Railway, or JR Kyushu, is focused on driving a recovery of its businesses following the COVID-19 pandemic. But there are structural headwinds, including a declining and aging population. In addition, train travel in Kyushu is less popular than other more densely populated and congested areas in Japan. Cars are a viable alternative, with around 60% of the island’s occupants owning a private vehicle. We expect greater earnings growth in the nonrailway segments, which have surpassed transportation earnings since fiscal 2021, driven by the pandemic hit on rail passenger numbers as well as investments in non-rail segments. We forecast the nonrailway segments to contribute about three-fourths of group earnings by fiscal 2028 from about 40% prepandemic.

We initiate research coverage of Kyushu Railway, or JR Kyushu, with a fair value estimate of JPY 2,900 per share. Shares currently trade at a 9% premium to our valuation, on a P/E ratio of 14 and offering a dividend yield of 3.2%. Significant improvement in returns to shareholders is unlikely in the medium term given a stretched balance sheet and significant capital expenditure requirements. We assign JR Kyushu a Medium Morningstar Uncertainty Rating, with relatively defensive revenue and a positive medium-term outlook balanced by high financial leverage. We assign a Standard Capital Allocation Rating based on its relatively weak balance sheet, fair investment efficacy, and appropriate shareholder distributions.