JR Central rating upgraded to A1 by Moody’s, outlook shifted to stable

Investing.com -- Moody’s Ratings has elevated the issuer and senior unsecured ratings of Central Japan Railway Company (JR Central) from A2 to A1, and altered the outlook from positive to stable. The rating upgrade is a reflection of the steady performance of JR Central following the recovery of its railway business, largely driven by the Tokaido Shinkansen bullet train, and its ability to generate strong earnings and cash flow.

According to Hiroe Yamamoto, a Moody’s Ratings Analyst, JR Central’s strong cash flow is instrumental in funding the construction of the Chuo Shinkansen maglev project.

The rating upgrade also acknowledges the consistent operation of the highly profitable railway business, as traffic has almost fully returned to pre-pandemic levels, enabling the company to generate strong cash flow. In fiscal 2024, JR Central’s railway revenues and ridership reached 103% and 97%, respectively, of levels for the fiscal year ended March 31, 2019 (fiscal 2018).

The company experienced an increase in inbound tourists between Tokyo, Kyoto, and Osaka, which contributed to higher revenues. JR Central is also implementing cost efficiencies while looking to expand its revenue. For fiscal 2025 and beyond, railway revenues are expected to remain flat at fiscal 2024 levels.

The A1 issuer rating of JR Central reflects the importance of its railway operations, notably the highly profitable Tokaido Shinkansen bullet train, which connects Japan’s three largest cities and economic hubs. The rating also takes into account the company’s ability to generate very high margin and cash flow.

The company’s high EBIT margin of 39.6% in fiscal 2024 is comparable to the 38% it generated in fiscal 2018. The company is expected to maintain its very high EBIT margin in the mid 30s in percentage terms over the next 2-3 years, which will allow a steady generation of cash flow.

The rating also considers the high fixed cost structure of the railway business, its reliance on the Tokaido Shinkansen bullet train, and cyclicality from its non-railway business. It also includes execution risks associated with the construction of its Chuo Shinkansen maglev project.

The completion schedule of the Chuo Shinkansen maglev project remains uncertain due to the complexity of the construction. The company has not altered its estimated project cost of JPY7.04 trillion. JR Central continues to accumulate excess cash flow from its existing business to fund the project. It has so far accumulated JPY1.7 trillion in reserves which will aid in funding the maglev construction.

Debt/EBITDA dropped to 5.3x in fiscal 2024 on a preliminary basis, from 6x in the previous fiscal year. Leverage is expected to remain in the high 5x over the next 12-18 months.

The stable outlook is based on the expectation that the company will maintain solid operating performance from its Tokaido Shinkansen bullet train and that its positive free cash flow will cover the Chuo Shinkansen maglev project. The stable outlook also assumes that the company will maintain a conservative financial policy.

An upgrade of JR Central is unlikely in the near future because its rating is already at the same level as that of the Government of Japan (A1 stable) and due to the execution risks associated with the Chuo Shinkansen project.

JR Central’s rating could be downgraded if the risks associated with the Chuo Shinkansen construction increase, or if an increase in construction cost worsens the company’s credit metrics. A more aggressive financial policy adopted by the company could also lead to a downgrade. Credit metrics that could lead to a downgrade include debt/EBITDA sustained above 6x.

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