JPMorgan released a report stating that MTR Corporation's (00066) full-year results for the period ending December 31, 2023, announced yesterday, were in line with market expectations. Full-year profit declined by 4% year-on-year. Recurring profit decreased by 22% year-on-year, impacted by one-off expenses and perpetual bond coupon payments. Excluding one-off items, management indicated that the decline in recurring profit would have been only in the single digits. The 22% drop in recurring profit was partially offset by an 8% year-on-year increase in earnings from property development projects. Overall, the results met expectations. JPMorgan maintains a target price of HK$29 on MTR and a "Neutral" rating.

The bank noted that the pace of profit recovery in MTR's transport business remains slower than anticipated, while the commercial and property segments continue to face pressure. Rent renewals at railway stations recorded an 8.5% decline last year, although this was an improvement compared to the 9.8% drop seen in 2024. Contributions from joint ventures saw a decline, with related capital expenditures remaining high. Capital expenditure for the second phase of the Northern Link project remains unclear.

Management provided capital expenditure guidance of approximately HK$82.6 billion for the period from 2026 to 2028. About 50% of this is allocated to maintenance of Hong Kong's railway network, 37% to new railway projects in Hong Kong, 11% to Hong Kong property projects, and the remaining 2% to investments in Mainland China and overseas. However, this three-year capital expenditure guidance does not specify costs for the Northern Link Phase 2, suggesting it is not yet incorporated into the current financial planning. Capital expenditure in the latter part of the 2020s may therefore increase.

Following the results, JPMorgan expects market revisions to forecasts for MTR to be modest, but anticipates a slightly negative stock price reaction. At current levels, the bank views the company's risk/reward profile as balanced, as the post-pandemic recovery of the local rail business is already priced in by the market. Upside potential is constrained by several factors, including the near-term or upcoming expiration of major overseas franchises; continued weakness in the New Territories leasing business; an expected slowdown in property development profits starting from 2027; and the high capital expenditure required to fund the Northern Link development.

Considering these factors, JPMorgan suggests that earnings per share may see a compound annual decline of approximately 16% for the 2025 to 2027 fiscal years. This could limit the potential for a significant valuation re-rating, although dividends are expected to remain stable.