JRE’s Business Transformation Takes Shape but OPEX Pressure Lingers; FVE Raised to JPY 9,500

We are raising our fair value estimate for East Japan Railway, or JRE, to JPY 9500 from JPY 9200, reflecting stronger growth in JRE’s Suica and IT business in the medium term and after rolling our cash flow model. JRE’s fiscal year ending March 2019 revenue and operating income were in line with our forecasts, with steady ridership volume and stronger growth in the nontransportation segments. The firm’s migration toward real estate, retail, and Suica services in the medium to long term is trending in line with our expectations, and we believe that these complementary businesses should benefit from JRE’s leading rail assets, which is Japan’s largest by distance covered. However, we think JRE is fairly valued presently, given risks for margin pressures over the medium term.