JRE’s Third-Quarter Results Undershot Our Expectations, Near-Term Headwinds on the Horizon

East Japan Railway, or JRE, delivered third-quarter results that were below our expectations, mainly due to a larger-than-expected spillover effect from Typhoon Faxai and Typhoon Hagibis on sales and operating expenses. This prompted management to revise its fiscal 2020 revenue and operating income target downward to JPY 3,041 and JPY 459 million, respectively (versus JPY 3,070 and JPY 488 million previously). We have revised our fiscal 2020 and 2021 assumptions lower, factoring in not only a bigger-than-expected effect from the natural disaster, but also the likely near-term headwinds due to the global outbreak of the coronavirus. However, our revisions have a limited impact on our fair value estimate, or FVE. We maintain our FVE for narrow-moat JRE at JPY 9,500 per share, and consider shares fully valued at current levels. Given the negative sentiment around the coronavirus, JRE’s share price may experience further downside volatility in the near term.