JR Kyushu: Initiating Coverage; Stock Screens as Slightly Overvalued

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.