MTR Corporation: Consider Both Earnings And Capital Return Outlook (Upgrade) (MTCPY)

MTR Corporation Limited (OTCPK:MTRJF, OTCPK:MTCPY) [66:HK] stock is now rated as a Hold. I have chosen to upgrade my rating for MTR Corporation from a Sell to a Hold, considering its positive earnings outlook. But MTRJF isn’t deserving of a Buy rating, as the company’s shareholder capital return prospects are likely to be negatively affected by an increase in both capital investments and financial leverage.

In my March 26, 2020, initiation piece, I described MTRJF as a Hong Kong company which “develops and manages residential and commercial properties located around its train stations under a ‘Rail Plus Property’ business model.” I previously assessed MTR Corporation’s interim results for 2020 and the stock’s valuations in my earlier August 25, 2020 write-up. The current article analyzes MTRJF’s recent financial disclosures for 1H 2024.

MTR Corporation’s shares are traded on the Stock Exchange of Hong Kong and the Over-The-Counter market. The company’s OTC shares have limited trading liquidity, but its Hong Kong-listed shares boasted a three-month mean daily trading value of $15 million (Source: S&P Capital IQ). Readers can buy or sell MTR Corporation’s liquid Hong Kong shares with US stockbrokers like Interactive Brokers or Hong Kong brokerages such as Boom Securities.

2024 Interim Results Were Above Expectations

MTR Corporation released the company’s financial results for the first half of this year with an earnings announcement issued on Thursday, August 15, 2024.

Revenue for MTRJF rose by +6.2% YoY from HK$27,574 million for 1H 2023 to HK$29,271 million in 1H 2024. MTR Corporation’s top line for the 2024 interim financial period turned out to be +3.2% above the market’s consensus projection of HK$28,371 million (Source: S&P Capital IQ).

The company’s net income attributable to shareholders grew by +44.7% YoY from HK$4,178 million in the first half of the prior year to HK$6,044 million in the first half of the current year. MTRJF’s actual 1H 2024 bottom line was a +27.1% beat as compared to the sell-side analysts’ consensus forecast of HK$4,757 million according to S&P Capital IQ data.

MTR Corporation’s recurrent businesses segment and property development segment saw their profits increase by +66.3% YoY and +137.7%, respectively for the first half of the year. In its earnings announcement, MTR Corporation indicated that the recurrent businesses segment derives the bulk of its earnings from “Hong Kong transport operations, Hong Kong station commercial businesses, Hong Kong property rental and management businesses.”

The best-performing sub-segment for MTRJF’s recurrent businesses segment was its Hong Kong transport services business, whose EBIT jumped by +125.8% YoY to HK$2,312 million in 1H 2024. In particular, patronage for the company’s Hong Kong cross-boundary train service increased by +65.6% YoY to 46.5 million for the 2024 interim financial period. MTR Corporation explained in its earnings announcement that its cross-boundary train service benefited from “a full six months of operations” in 1H 2024 vis-à-vis 1H 2023 “when the service began resuming gradually in January and February” last year. China’s “zero-COVID” policy ended in December 2022, and travel between Hong Kong and Mainland China via the cross-boundary train service only started again progressively in early 2023.

Separately, MTRJF’s property development segment’s first-half earnings were boosted by “the further profit recognition” from property development projects like “THE SOUTHSIDE Package 1 & 2 and LOHAS Park Package 11” as indicated in its results presentation slides.

Looking beyond the 1H 2024 results beat, MTR Corporation’s financial prospects remain favorable.

It is worth highlighting that the company’s recurrent businesses segment contributed two-thirds of the company’s 1H 2024 net income attributable to shareholders. As such, a significant proportion of MTRJF’s future earnings will be underpinned by stable recurring revenue businesses like its Hong Kong public transport services.

For its property development segment, MTR Corporation guided in its earnings announcement that it expects to recognize “property development profit” from multiple projects like “THE SOUTHSIDE Package 4 and Package 5, Ho Man Tin Station Package 1 and Package 2” and “LOHAS Park Package 11” in 2H 2024. Moreover, most of MTRJF’s recent property development projects launched this year have been reasonably successful. As revealed in its results presentation, approximately 90%, 88%, and 61% of the units for its Seasons Place, Blue Coast, and Onmantin property development projects launched in 1H 2024 have been sold, respectively as of the end of June.

To sum things up, MTR Corporation’s 2024 interim results were strong, and I expect the company to continue performing well going forward. MTRJF’s recurrent business segment boasts a steady recurring earnings profile, as demand for public transport services is likely to remain fairly stable in the absence of extreme events like pandemics. On the other hand, MTR Corporation’s recent new property development project launches have been well received, as evidenced by the high percentage of units sold. The consensus FY 2024-2026 normalized EPS CAGR estimate for MTR Corporation is a decent +11.1% as per S&P Capital IQ, which I deem to be realistic for the reasons mentioned above.

But Capital Return Prospects Are Unfavorable

MTR Corporation announced an interim dividend per share of HK$0.42 for 1H 2024, which was the same as its actual dividend distribution in 1H 2023. Given that MTRJF’s net profit attributable to shareholders rose substantially by +44.7% YoY in 1H 2024, it is a disappointment that the company didn’t increase its dividend.

Assuming that MTR Corporation’s full-year FY 2024 dividend distribution remains the same as that for FY 2023 (HK$1.31 per share), the stock’s potential forward dividend yield is around 4.8%. As a comparison, Hong Kong’s leading property development company Sun Hung Kai Properties Limited (OTCPK:SUHJY, OTCPK:SUHJF) [16:HK] offers a relatively more attractive consensus next twelve months dividend yield of 5.6% (Source: S&P Capital IQ).

In my opinion, it is likely that MTR Corporation will find it tough to raise its future dividend distribution, considering the company’s capital expenditures and financial leverage.

The company’s net debt-to-equity metric increased from 26.5% as of end-FY 2023 to 27.5% as of end-1H 2024. MTRJF attributed the higher net gearing ratio to “capital expenditure for new railway projects” in its results announcement.

Moving ahead, the analysts are forecasting that MTR Corporation’s net debt-to-EBITDA ratio will increase from 2.3 times for FY 2024 to 3.1 times and 3.4 times in FY 2025 and FY 2026, respectively as per S&P Capital IQ data. The sell-side’s projection of an increase in MTRJF’s future net debt-to-EBITDA metric is reasonable, considering the company’s capital expenditures plan. MTR Corporation anticipates spending an average of HK$29.9 billion (Source: 1H 2024 results presentation) per year on capital expenditures for the next three years (FY 2024-2026). In comparison, the company’s actual FY 2023 capital expenditures were relatively more modest at HK$12.6 billion.

In a nutshell, it is highly probable that MTR Corporation will stick with a similar level of dividend distributions for the foreseeable future. While the company’s 1H 2024 earnings have grown significantly, higher capital expenditures and financial leverage will cap the amount of excess capital available for an increase in dividend distributions.

Conclusion

MTR Corporation Limited stock’s risk-reward is mixed, and this points to a Hold rating for the shares. On one hand, MTRJF’s 1H 2024 earnings beat expectations, and the company’s bottom-line outlook is positive. On the other hand, MTR Corporation is expected to witness an increase in capital expenditures and financial leverage for the next few years.

Furthermore, the stock is fairly valued with a Price-to-Earnings Growth or PEG ratio of close to 1 or 1.06 times (11.8/11.1) to be exact. MTR Corporation’s consensus next twelve months’ normalized P/E multiple and its consensus FY 2024-2026 normalized EPS CAGR forecast are 11.8 times and +11.1% (Source: S&P Capital IQ), respectively.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.