Is It The Right Time To Invest In MTR Corporation Ltd?

MTR Corporation Ltd (MTR) is a leading railway transportation conglomerate of the world. Founded in 1975, MTR operates a portfolio of railway assets in Hong Kong, Mainland China, Australia, Sweden, and the United Kingdom. In addition, MTR derives additional income from a portfolio of real estate development and investment activities mainly in Hong Kong. As of 10 August 2019, MTR is valued at HK$ 301.5 billion in market capitalisation. 

Here, I’ll bring an update on its financial results, plans for growth, and valuation figures. The following is a list of 13 things to know about MTR before you invest into it:

  • Revenue Breakdown
    The following is a breakdown of revenues generated in 2018:

Revenue 2018 (HK$ Million)Revenue 2018 (%)
HK Transport Operations19,49036.1%
HK Station Commercial Business6,45812.0%
HK Property Investments5,0559.4%
Overseas Operations20,87738.7%
Other Businesses2,1744.0%

Source: MTR’s Annual Report 2018

  • Segment 1: HK Transport Operations
    MTR is the operator of the following:

    – Urban Mass Transit Railway in Hong Kong.
    – The Airport Express for the HKIA and the AsiaWorld-Expo
    – Cross-Boundary Railway Connection at Lo Wu and Lok Ma Chau
    – Hong Kong Section: High Speed Rail of Guangzhou-Shenzhen-HK.
    – Light Rail & Bus Feeder in the North West New Territories

    Overall, this division has achieved a CAGR of 6.0% in revenues, up from HK$ 11.5 billion in 2009 to HK$ 19.5 billion in 2018. It is contributed by progressive expansion of railway services and steady rise in ridership in the 10-year period.

Source: MTR’s Annual Report 2018

  • Segment 2: HK Station Commercial Business
    This involves mostly leasing commercial and advertising spaces at MTR stations. In 2018, MTR has 1,470 station shops which occupy 66,292 sq. m. of retail spaces. This division achieved a CAGR of 10.0% in revenues, up from HK$ 2.74 billion in 2009 to HK$ 6.46 billion in 2018.

Source: MTR’s Annual Report 2018

  • Segment 3: HK Property Investments
    MTR derives rental income a portfolio of 13 shopping malls and a total of 18 floors in Two International Finance Centre. Segment revenue has increased by a CAGR of 7.5% for the last 10 years, rising from HK$ 2.63 billion in 2009 to HK$ 5.05 billion in 2018. This is attributed to having a positive rental reversions for its investment properties. In 2018, MTR’s investment properties are valued to be HK$ 82.3 billion.

Source: MTR’s Annual Report 2018

  • Segment 4: Overseas Operations
    MTR operates nine railway lines in four countries as follows:

Source: MTR’s Annual Reports

MTR has began its operations of the Stockholm Metro and Melbourne Metro in November 2009. Since then, they had contributed to a stable sales performance from 2010 to 2016. In 2017, MTR started operations of the Sydney Metro Northwest and thus, contributing to this division’s jump in revenues in 2017 and 2018.

Source: MTR’s Annual Reports

  • Group Financial Results
    Overall, MTR has achieved a CAGR of 12.4% and 4.9% in group revenue and underlying profits for the last 10 years. Its revenues have increased at a much faster pace due to a significant jump in revenue as a result of the commencement of railway assets in Australia and Sweden. Earnings did not increase as fast as its Swedish operation remained unprofitable.

Source: MTR’s Annual Reports

MTR has a 10-Year Return on Equity (ROE) average of 6.68% per annum and thus, indicating that it made HK$ 6.68 in annual earnings from HK$ 100.00 it has in shareholders’ equity for the last 10 years.

  • Balance Sheet Strength
    As of 30 June 2019, MTR has a net debt-to-equity ratio of 14.4%. It has consolidated group borrowings & other obligations of HK$ 37.1 billion, where MTR incurs an average borrowing costs of 2.8% per annum. The company is granted AA+ and Aa2 credit ratings by Standard & Poor’s & Moody’s credit rating agencies respectively.

  • Growth Plan 1: Shatin to Central Link (SCL)
    It consists of two sections where the Tai Wai to Hung Hom Stations had attained a 99.7% completion and Hung Hom to Admiralty Stations have achieved a 78.8% completion as of 30 June 2019. The HK government is responsible to fund the SCL project costs, which was estimated to be as much as HK$ 87.3 billion.

    In H1 2018, there were allegations concerning workmanship to its Hung Hom Station extension. After a series of investigations, MTR has agreed to finance HK$ 2.0 billion in incidental costs to do alteration works, trial operations, and phased opening expenses on the station. This caused a provision expense of HK$ 2.0 billion reported in H1 2019.

  • Growth Plan 2: Fleet Expansion
    MTR has placed an order for 93 new trains and received seven of them, as of July 2019. In addition, MTR has placed another order for 40 brand new light rail vehicles, where 30 of them are to replace its old ones and the remaining 10 will help to boost its fleet size to 150 by 2023.

  • Growth Plan 3: More Shopping Malls
    MTR is developing three new shopping malls which will add 49% to the existing retail portfolio over the next four years. They are:

Source: 2019 Interim Results

  • P/E Ratio
    As of 10 August 2019, MTR is trading at HK$ 49.15 a share. Based on its earnings per share (EPS) of HK$ 1.86 in 2018, its P/E Ratio is 26.42. That is the highest in 10 years.

  • P/B Ratio
    As of 30 June 2019, MTR has a net assets of HK$ 29.39 a share. Thus, it has a current P/B Ratio of 1.67, the highest in 10 years.

  • Dividend Yields
    In 2018, MTR has paid out HK$ 1.20 in dividends per share (DPS), which is a continuous raise from HK$ 0.52 in 2009. Its current dividend yield is 2.44% per annum, below its 10-Year average of 2.70% a year.

Source: MTR’s Annual Reports

VIA’s Verdict

Overall, MTR has delivered sustainable growth in sales, profits, and dividends in the last 10 years. As such, its stock price had risen sustainably, raising its market capitalisation from HK$ 152.6 billion in 2009 to HK$ 301.5 billion in 2018. 

Despite the recent Hong Kong Protest, its stock prices had remained resilient. It is trading at above its long-term valuation averages and offers below average in dividend yields, as I write. 

So, will you invest in MTR at HK$ 49.10 a share? 

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