Cutting JR East’s FVE to JPY 9200 on Medium-Term Margin Pressure; Cautious on Rising OPEX

We reduce our fair value estimate for JR East to JPY 9200 from JPY 9500, driven by a less positive outlook on the profitability of the transportation business in the medium term. While the company posted solid top-line growth of 3.2% year over year in the fiscal third quarter (for the fiscal year ending March 2019), operating margin fell slightly to 19.4% from 19.6% a year ago. JR East has seen margins grow over the past five years, but we think this trend is reversing. We see cost pressure in the transportation business, which accounts for 68% of revenue. More specifically, higher unit labor and business consignment costs have had a negative impact, driven by personnel shortages. Sales growth was strong across all segments, especially transportation sales, which saw 1.3% increase in the first nine months versus the same period last year. Given rising operating expenses, we have reduced our fiscal 2018 operating income to JPY 481 billion from JPY 498 previously.