Expansion Of Suica Services And Technology Upgrades Will Enhance Future Operations

Key Takeaways

• Revised fare systems and Suica service expansions are likely to drive revenue growth and enhance customer engagement in transportation and lifestyle services.
  
• Strategic investments and development projects, alongside improved investor communication, aim to boost operational efficiency, tenant income, and ROE targets, increasing investor confidence.
  
• Rising costs and increased debt could pressure earnings, while external factors and regulatory uncertainties pose risks to future revenue growth.

Catalysts

Operates as a passenger railway company in Japan and internationally.

• Introduction of revised fare systems and anticipated approval for fare revision in 2024 to 2025, leading to an expected revenue increase of ¥88.1 billion by March 2026. This is likely to positively impact future transportation revenue growth.
  
• Expansion of Suica services including mobile Suica for overseas customers and integration of region-wide services by 2027 enhances daily customer engagement, positioning Suica as a broader lifestyle product, potentially increasing the company's revenue streams.
  
• Takanawa Gateway City development with planned openings leading to increased tenant occupancy above 80%, expected to improve net incomes significantly in FY '25 as more tenants move in.
  
• Significant investments in technology and system upgrades, such as walk-through ticket gates, cloud-based services, and subscription-like products for train and lifestyle services, are likely to drive efficiency improvements and higher operating margins.
  
• Enhanced investor communication and capital market transparency measures include setting a double-digit ROE target, which can elevate investor confidence and potentially lead to higher earnings per share (EPS) growth.

East Japan Railway Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming East Japan Railway's revenue will grow by 4.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.0% today to 9.0% in 3 years time.
• Analysts expect earnings to reach ¥291.4 billion (and earnings per share of ¥259.47) by about May 2028, up from ¥227.8 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ¥325.3 billion in earnings, and the most bearish expecting ¥215.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.5x on those 2028 earnings, up from 15.4x today. This future PE is greater than the current PE for the JP Transportation industry at 10.1x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.93%, as per the Simply Wall St company report.

East Japan Railway Future Earnings Per Share Growth

Risks

• Rising maintenance and infrastructure costs could strain net margins and reduce profitability, considering expenses are expected to impact fourth-quarter financials.
  
• Withdrawal costs from the wind power generation business negatively impacted profits, indicating potential risks in diversification efforts and affecting earnings.
  
• Interest-bearing debt has increased significantly, raising concerns about interest expense and potential impacts on net income if rates rise further.
  
• Operating revenue from transportation advertising remains significantly below pre-pandemic levels, posing a risk to potential growth in this revenue stream.
  
• Uncertainty around regulatory approvals for fare revision could impact revenue projections if not achieved in the expected timeframe.

Valuation

• The analysts have a consensus price target of ¥3283.333 for East Japan Railway based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ¥4000.0, and the most bearish reporting a price target of just ¥2600.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥3236.6 billion, earnings will come to ¥291.4 billion, and it would be trading on a PE ratio of 16.5x, assuming you use a discount rate of 8.9%.
• Given the current share price of ¥3096.0, the analyst price target of ¥3283.33 is 5.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.