EUR 850.00 For Business Accounts Only

Morningstar | MTR Books Provision for Shatin-Central Link; Long-Term Thesis and FVE Unchanged

MTR Corp will take a HKD 2 billion provision for the construction issue at the Hung Hom station and another GBP 43 million, or HKD 430 million for its 30%-owned First MTR South Western Trains in the United Kingdom. Discussion with the government regarding a settlement for the construction issues at Hung Hom station is ongoing. MTR is responsible for the construction of the Shatin-Central Link, or SCL, project and is liable for any additional costs as set out in the agreement. Total liability is capped to the HKD 7.9 billion in fees received by MTR for the SCL project though the cap does not apply if fraud and dishonest conduct by MTR is involved. MTR may also seek compensation from its contractors. The total of HKD 2.43 billion is insignificant in the context of MTR’s current market capitalisation of HKD 350 billion and our fair value of HKD 48 is reaffirmed. In our view, the HKD 2 billion provision for the SCL project was expected and more importantly, the firm’s rail plus property business model is unchanged. We reiterate our view in a note published earlier this week that MTR is overvalued at current prices. The narrow-moat rail operator outperformed the market as investors refocused on high-yielding securities. With the U.S. Federal Reserve adopting a more loose monetary policy, we expect the firm’s share price to continue to trade above our fair value in the medium term.