TOKYO -- Shares in the operator of the Skyliner airport express train have climbed to their highest since 1990 thanks to its sizable stake in Tokyo Disneyland's owner, but investors will likely demand something more substantial than these mostly paper gains to keep the rally going.
Keisei Electric Railway's 22% interest in Oriental Land is valued at roughly 1.3 trillion yen ($12 billion). The rail company logged 20.2 billion yen in profit from equity-method affiliates in fiscal 2018 -- equivalent to just over half its total net profit and well over double the figure 20 years earlier, reflecting Oriental Land's long-lived expansion.
But Keisei is a railway company that happens to own a stake in Tokyo Disney. Ultimately its fortunes depend on how it develops its main business, not how its investment portfolio fares.
Unless the stake is sold, the Disney holding's only contribution to cash flow is about 3 billion yen in dividends -- just 10% or so of Keisei's free cash flow over the past five or six years.
Market players tend to discount the value of businesses that hold other companies' stock for reasons besides investing. Some analysts argue that Keisei's management should explain the significance of the holding from a capital efficiency perspective.
"Our only concrete partnership with Keisei is in the taxi and bus business," an Oriental Land source said. "We want Keisei to keep holding [the stock] because it's hands-off, and it's hard to imagine it selling."
If the Oriental Land stake offers so little benefit to shareholders, then what of Keisei's actual business? The company reported a record-high operating profit in fiscal 2018, but its operating profit margin of 12.1% came in behind that of fellow Tokyo-area rail operators Seibu Holdings and Sotetsu Holdings.
Keisei led the industry in profitability in fiscal 2009. But Seibu and Sotetsu have gained a larger presence in the more lucrative hotel business, which contributes about 10% of their operating profits. Keisei's leisure services segment, which includes hotels, contributes less than 2%.
Whether it can regain the lead will depend on its plans to expand service on the Skyliner train connecting Narita Airport and downtown Tokyo.
"I prefer the Skyliner over the Narita Express. It's faster," said one American traveler, comparing it to the rival express train run by East Japan Railway Company (JR East).
The Skyliner takes just 36 minutes from Narita Airport to Nippori Station in central Tokyo -- a fact that draws many foreign travelers to the link.
Both the number of passengers and revenue are expected to jump about 10% this fiscal year for Keisei's express trains either departing from or ending at Narita Airport. The trains logged similar growth in the previous two years as well.
Scheduling changes effective Oct. 26 will increase the number of Skyliner trains by about 40% to 82 a day. The operator hopes to attract even more passengers by running a train about every 20 minutes.
"Foreign visitors will see the Skyliner as a more convenient option with more frequent trains," said Ryota Himeno, an analyst at JPMorgan Securities Japan.
But this golden goose "requires a lot of investment," according to Keisei's management division.
Industry insiders say one train car costs about 100 million yen to make. Meanwhile, one eight-car Skyliner train costs approximately 1.9 billion yen, for an average of 230 million yen a car, according to the company.
Running more trains also means paying more in fees to the owners of the tracks leading to the airport.
If the company can keep up its growth rate, which is unusually high for a private railway, it could earn back its investments quicker and could underpin its shares without relying on its stake in Oriental Land.