JR Central: Reinitiating Coverage; Stock Screens as Overvalued

We initiate research coverage of Central Japan Railway Company, or JR Central, with a fair value estimate of JPY 16,000 per share, based on a weighted average cost of capital of 4.5%. While owning high-quality infrastructure, we think it is overvalued, trading about 20% above our valuation. Forward valuation metrics are undemanding, with a P/E ratio of 15 and an enterprise value/EBITDA multiple of 9. But we think returns on invested capital are destined to fall when the Chuo magnetic levitation Shinkansen starts operating late this decade, even if this costly project is delivered on time and budget. The forecast dividend yield is 0.7% because of a very low dividend payout ratio of about 10% as the firm retains earnings to pay for the new Shinkansen.