East generates more business than West Railway
Stock: West Japan Railway Co. 9021 (Japan: Tokyo); East Japan Railway Co. 9020 (Japan: Tokyo)
So far this year, West Japan has outperformed its peer having provided 6.11% percentage points more in total returns to shareholders.
Both railways trace their origins from April 1, 1987, during the privatization of the Japanese National Railways.
In the recent quarter of operations, West outperformed east in terms of year over year revenue growth having generated 26% (vs. 3-year ave. 2.69%) to ¥352.5 billion compared to East’s 4.3% (vs. 3-year ave. 2.15%) to ¥711.9 billion.
Meanwhile, profit margins for both railways were better than its prior year operations with 9.9% for West and 12.1% for East Railway (vs. 3-year margin averages of 5.73% and 8.25%, respectively).
As of June, West increased its cash by ¥8 billion to ¥41.5 billion while East’s rose by ¥279 million to ¥59.8 billion. On the other hand, debt increased in the West by ¥68.3 billion to ¥958 billion and ¥42.4 billion in the East to ¥2.9 trillion.
In addition, West’s equity rose by ¥71.8 billion to ¥962 billion while East’s increased by ¥238.2 billion to ¥2.7 trillion. Both railways, nonetheless, appeared to be similarly leveraged with 1x and 1.06x debt-equity ratios, respectively.
In the past three years, West’s dividend payouts represented just 10.5% of its accumulative free cash flow vs. East’s 61.4%. West also raised ¥90.2 billion in debt and other financing activities compared to East’s net debt reduction of ¥113.6 billion.
Solving for the corresponding conservative per share figures using historical PS multiples, revenue growth, and 15% margin indicated a figure of ¥6,494 (-17% lower than today’s price of ¥7,831) for West and ¥9,296 (-11% lower than today’s price of ¥10,485) for East Railway.
In summary, both railway companies have a leveraged balance sheet, steady revenue growth, but it does seem that East generates more business overall and has provided more payouts to shareholders in recent years. West, nonetheless, has outshined East in the recent quarter albeit it still has yet to be a net debt payer in the recent quarter compared to its peer.
All these reasons could probably explain why East Japan is valued ¥2.51 trillion more than its western counterpart.
Disclosure: I do not have shares in any of the companies mentioned.
Perennial investing by Mark Y. 