MTR: 2023 Earnings Under Pressure Due to One-Off Charge on Stockholm Commuter Rail Service

We maintain our fair value estimate of HKD 42 for narrow-moat MTR following the announcement of the early termination of the loss-making Stockholm commuter rail service, or Stockholms pendeltag, in March 2024, ahead of the contract expiration in 2026. We believe this is due to the challenging environment given the shortage of operational staff and maintenance issues. We are mildly positive on the early termination as it allows the company to cut losses on an unprofitable venture and reallocate its resources to other parts of its business. While we estimate a 2%-3% hit to its 2024-26 top line due to the early termination, we expect a 1% accretion to MTR’s bottom line over the same period. That said, we lower our 2023 earnings per share forecast by 9% to HKD 1.18, as the company expects to incur a total of SEK 1 billion, or a HKD 700-million charge in 2023 for 1) the exit fee; 2) the provision for inventory and assets to be transferred to the new operator with no consideration; and 3) the assets to be written off. We maintain our 2023 dividend per share forecast of HKD 1.35 given MTR’s progressive dividend policy. Our long-term view for the company remains unchanged, as we continue to expect MTR to benefit from market share gains from other public transportation modes as the company continues to expand its railway network. We think the shares are currently attractive with a 30% discount to our fair value estimate, as of the Nov. 1 close price.