EUR 850.00 For Business Accounts Only

Morningstar | Minimal Financial Impact From Investigation Findings; MTR Remains Slightly Undervalued

MTR submitted its investigation findings on a large service disruption in mid-October, which affected four of its high patronage subway lines. The issue lies within the existing signalling system, which was supplied by two separate companies progressively since 1996, and not due to the current signal upgrade program underway. MTR noted the incident will result in an HKD 8 million fine under the service performance arrangement. As highlighted in our company report, we note penalties applied to MTR under the current regime are not excessive. Specifically on the service performance arrangement, each incident is capped at a maximum of HKD 25 million.

The investigation on the Shatin to Central Link, or SCL, Project is also ongoing and a final submission by the commission investigating is expected before the end of January next year. We reiterate that the current business structure of the MTR and rail plus property model is unlikely to be altered. As previously noted, the SCL is ultimately owned by the Hong Kong government with MTR acting as project manager. The liability for MTR is also capped at the fees MTR receives from the government as project manager if MTR is deemed negligent in performing its duties and obligations under the agreement.

While MTR’s share price underperformed the wider Hang Seng Index earlier this year as the SCL issue unfolded, the stock regained its defensive status in the second half of the year as concerns alleviated. We expect the latter to continue if concerns over weaker global economic growth and trade persist, weighing on the wider equity market in 2019. While our 3-star rating is unchanged as the stock is only slightly undervalued, forecast dividend yield of 2.8% is supported by the defensive rail business and investment properties.