MTR: We Continue to See Long-Term Value Despite Loss of the Elizabeth Line Contract

We keep narrow-moat-rated MTR’s fair value estimate unchanged at HKD 32 per share after reviewing our assumptions. According to media reports, MTR has lost its bid to renew the contract for London’s Elizabeth Line and will cease to be the operator in May 2025. As such, we lower our revenue forecasts by 6% from 2026 onward as the full-year impact kicks in. That said, this is offset by higher near-term property development profit forecasts, as the company shared improved visibility on profit booking for a few of its residential projects after obtaining occupation permits. Overall, we raise our 2024-26 earnings forecasts by 8%-24%, but lower 2027-28 forecasts by 4%. We continue to forecast a 2024 dividend per share of HKD 1.32, implying a dividend yield of 4.8%. We think shares are undervalued, with a 13% discount to our valuation. We see long-term value in MTR as it gains market share from other modes of transportation through continuous expansion of its railway network.