Coronavirus Investing: Why MTR Corp is a Safe Stock for Long-Term Investors

上市3年的Okta(NASDAQ:OKTA)股價累計升逾13倍,未上車的投資者是否已錯過最佳時機?

Some infrastructure stocks are more than just a government-backed, toll fee-based, mass-scale project.

Majority-owned by the Hong Kong government, MTR Corporation (SEHK: 66) is not only a major transportation provider in Hong Kong, but also a developer, property manager with businesses expanding worldwide.

MTR’s sustainability and profitability of business can prove a safe investment for those seeking long-term yield in this unstable environment. It has also shown resilience even in difficult times.

Profitable projects

MTR calls its business model “rail + property development”. As the company builds new rail lines, it uses the government-endowed “development rights” to cooperate with private developers and build properties such as residences and commercial projects.

At the same time, it benefits from the increase in property values as a result of new rail lines. This model has distinguished MTR from other infrastructure companies around the world, as many tend to operate on consistent net loss and fail to find income streams.

More recently, MTR’s rail lines and property development business have expanded into Mainland China, Australia, the UK, and Sweden.

As of the end of 2019, MTR’s transport business in Hong Kong has a 47.4% market share (down from 49% in 2018). This is a promise of a solid customer base for the business.

Resilience in difficult times

Despite data showing that total revenue at the company has been growing at a steady pace since 2009, 2019 for MTR ended with a darker turn.

The company has suffered a great loss in the second half of the year as a result of Hong Kong’s protests and a serious crash on one of its metro lines under construction.

Currently, MTR’s share price is at its six-month low. In the next few weeks, more volatility will likely to follow as the Hong Kong government has further restricted travel to the city on 17 March and fears surrounding the Covid-19 outbreak persist.

Its trailing price-to-earnings (PE) ratio is 18.6 and its price-to-book (PB) ratio is 1.5, a sign that the share price may be a bargain for potential buyers.

Business fundamentals

According to MTR’s 2019 annual report, the overall recurrent profit is down by almost 45% year-on-year and underlying profit down 6.2% year-on-year. The EBITDA margin of the Hong Kong transportation business has dipped 12.3% to less than 30%.

But a closer look shows that overall revenue in 2019 has in fact increased in all business lines. Unfortunately, this is offset by increased expenses, which explains the significant drop in overall profit.

Nevertheless, profit from Hong Kong property development has achieved a year-on-year growth of over 100%, from HK$2.5 billion (US$322.2 million) to HK$5.7 billion. In this business segment, the EBITDA margin remains high at 83.4%, albeit with a 0.5% decline recently.

There are other reasons to regard MTR as a generally safe and stable investment. With shrinking income and more borrowing activities in 2019, MTR’s net asset value (NAV) has actually seen a slight uptick of 3%.

Furthermore, its total annual dividend payment has been on the rise since 2007, and reached HK$1.23 per share in 2019.

Further challenges

So far, 2020 does not bode well for MTR Corp. Its various business operations may see a major impact from the worldwide Covid-19 outbreak, which has quelled people’s movements and limited consumer activities.

On top of that, the economy of Hong Kong – MTR’s major market – has contracted in the past two quarters and sees little signs of a strong recovery in the near term.

The company is actively diversifying its business in other parts of the world. Sometimes, this mitigates the risks of exposure to a single market.

That being said, this year will be especially challenging due to an imminent global economic downturn, especially in markets where MTR has commercial interests.

MTR revealed in its 2019 annual results that the impact of the Covid-19 outbreak and the aftermath of the previous protests amounted to HK$1.3 billion on the net profit of its recurring businesses. To put that into perspective, this accounts for only 10% of the group’s profit last year. 

Foolish conclusion

With short-term disruptive factors in sight, MTR may not be able to generate immediate yields.

However, its resilient financials indicate that the stock is poised for a strong comeback in the near future and will eventually reward long-term investors.

分享給你的朋友