EUR 850.00 For Business Accounts Only

Morningstar | MTR Reports Solid Fiscal 2018 Result; Patronage Growth and Rental Income Resilient. See Updated Analyst Note from 08 Mar 2019

Narrow-moat-rated MTR reported solid second-half and fiscal 2018 results. We have increased our fair value estimate to HKD 48 per share from HKD 43 and continue to see the rail operator as fairly valued. There is no change in our thesis, and the group’s resilient recurring income and cash flow will see the company trade as a defensive stock, particularly in a down market. This is supported by a forecast dividend yield of close to 3%. The final dividend of HKD 0.95 takes the fiscal 2018 dividend to HKD 1.20. The investigation on the Shatin-Central Link is continuing, and we reiterate that MTR’s liability is limited as the government is the ultimate owner and MTR is acting as project manager. More important, we do not see a change in the business structure and its "rail plus property" model. The core rail business, station commercial businesses, and rental from investment properties, which underpin the group’s recurrent income, continue to perform well.

Patronage growth was higher across all services, as tourist arrivals recovered in 2018. Total patronage increased 2.2%, largely in line with the previous year. Fiscal 2019 will include a full-year contribution from the high-speed rail, which finally kicked off its operation in September 2018. Average daily patronage was 53,000 for the two and half months of operation, and we expect steady increases thereafter as operations ramp up.

The launch of high-speed rail and the opening of the station also bumped up advertising and station retail revenue, with station commercial revenue increasing 8.1%. The last component of its recurrent rental income from its investment property also saw a 3.2% increase in revenue. As expected, both the retail component and offices at Two IFC were fully occupied. Given the high traffic flow for the retail component and the premier location of Two IFC, we expect full occupancy in a downturn, with the downside limited to lower rental income. The addition of the Lohas Park shopping center in the second half of 2020 and two malls in Tai Wai and Wong Chuk Hang in 2023 will increase its retail gross floor area by 49%. Our forecasts previously incorporated a bump in rental revenue in 2021 and 2024, though the latter may be adjusted closer to the completion date.

The development business, which forms part of MTR’s compensation under the rail-plus-property model, saw revenue from Lohas Park 4 booked at the end of 2018. The timing was slightly ahead of expectations as we assumed recognition in 2019. Management expects Lohas Park 5 to be booked in 2019, depending on construction progress. The project is nearly fully presold. Three tenders were completed in 2018, and the company expects to tender Lohas Park 11 and 12 and the fourth package at Wong Chuk Hang Station in 2019. The three sites will provide 4,500 residential units and continue to underpin returns for MTR.