MTR has hopped back on the growth track

There's improved visibility on new railways' progress.

MTR’s 1H14 underlying net profit of HKD4,389mn (+3% y-y) is in line with Nomura’s and consensus estimates.

According to a research note from Nomura, it believes investors’ focus is less on the actual numbers and more on the following two aspects on which MTR has been able to clear most of the uncertainties.

New railway projects’ delays and cost overruns – overall the impact on earnings and NAV is limited: South Island Line East and Kwun Tong Line Extension are now more likely to be completed sometime in 2016F (instead of by end-2015F), while cost over-run is merely HKD3bn (HKD1.3bn/1.7bn attributable to West Island Line/South Island Line East).

Here’s more from Nomura:

Property development profits should be bottoming – following 2013 when profit of HKD1.4bn hit the lowest since listing, we estimate profit will likely recover in 2014F and 2015F to HKD2.5bn and HKD2.3bn, respectively, as MTR guides for three projects (The Austin, Grand Austin, and LOHAS Park Package 3) to be completed over the next six months.

MTR also plans to speed up its property tender schedule, from only one in 1H14 to up to three in 2H14F.

We lift our FY14F EPS by 2% (some house-keeping items), and cut our FY15F EPS by 21% mostly owing to pushing out Tin Shui Wai project completion to beyond 2017F (and to a small extent, the delay in new railways’ completion).

These factors have little impact on our NAV estimate (which remains intact at HKD45) and the value proposition of investing into MTR shares – with capex peaking in FY14F-15F, we project a structural increase in dividends, with its FY15F yields matching other HK utilities counters.