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Nikkei Markets

MTR gains on dividend comfort despite profit hit from unrest

Rail operator puts profit impact from protests and vandalism at HK$1.6 bn

Riot police stand guard inside Sha Tin Mass Transit Railway (MTR) station as anti-government protesters gather to demonstrate against the railway operator, which they accuse of helping the government, in Hong Kong, China September 25, 2019.   © Reuters

HONG KONG (Nikkei Markets) -- Shares of MTR edged higher on Friday despite a profit warning from the Hong Kong light rail operator, supported by the prospect of higher dividend and some relief that the financial impact from protests wasn't as bad as feared.

MTR, owned more than 75% by the Hong Kong government, said late on Thursday that its overall financial position remains "sound" despite a series of adverse factors that have hurt its performance in 2019, leading its board to maintain a "progressive" policy toward dividends. The company estimated a hit of HK$1.6 billion ($204 million) to its profit this year because of a reduction in patronage, damage from vandalism to its facilities and additional costs incurred to beef up staffing and security at its stations amid city-wide protests.

Castor Pang, head of research at Core Pacific Yamaichi International (H.K.), said the profit warning in itself was not a surprise, given that MTR was "the major target" for radical activists to vent their anger during anti-government protests.

Pointing to the stock's tumble from an all-time high above HK$55, which it touched as recently as July, he said the shares had short-term support near HK$42.

Outperforming the broader market, shares of MTR climbed 1.5% to HK$44.20 as of 1:41 p.m. in Hong Kong on Friday, while the city's benchmark Hang Seng Index gained 0.6%. Despite the retreat from its record highs, the stock is still up more than 7% this year, over three times the advance by the Hang Seng Index during the same period.

At its current price, the company's stock has a dividend yield of around 2.7%.

MTR has progressively increased its regular dividends in recent years, with the payout for 2018 rising to HK$1.20 per share from HK$1.05 for 2014. It also declared special dividends in two of the previous five years. It has already paid an interim dividend of HK$0.25 a share for 2019, unchanged from last year.

Analysts at Goldman Sachs say MTR's announcement should ease market concern that MTR's profit would be severely impacted by the recent Hong Kong unrest, thereby affecting its dividend payout.

"While it remains uncertain how long the unrest will persist, our cash flow analysis suggests the company has more than sufficient recurring cash flow to maintain progressive dividend policy," they said. The U.S. brokerage maintained its "buy" rating and price target of HK$54 on the stock.

The city's anti-government protests began peacefully in June to seek the withdrawal of a bill that would have allowed Hong Kongers to be transferred to other places including mainland China to stand trial. But they have since then turned into a wider movement to demand, among other things, universal suffrage and an independent inquiry into police actions.

MTR wasn't a target in the initial weeks of the protests. That changed in August, after the company came under criticism from mainland media for its "soft" approach to dealing with protesters' actions at train stations. Protesters began to vent their anger at various MTR stations after the company, in late August, said it will shut stations without prior notice in case of violence.

MTR said on Thursday its patronage slumped more than 27% in October and November from a year ago amid the protests, compared with a decline of less than 7.5% in the preceding three months.

The hit from the protests comes on top of provisions worth HK$2.43 billion that the company took for the first six months of 2019. Most of that charge was for costs related to a troubled line under construction from Sha Tin to Central stations in Hong Kong.

MTR is also a major property developer and operates several malls at locations adjoining its stations.

Analysts at UBS wrote in a note on Friday that about 55%-60% of the HK$1.6 billion impact estimated by MTR was likely because of foregone transport revenue, around 20%-30% could be attributed to damages to its stations, and between 10%-20% to higher operating costs.

UBS expects MTR to keep the growth in its dividend per share in the "low single digits" for 2019. The brokerage cut its price target for MTR to HK$47.70 from HK$48.70, while maintaining its "neutral" rating.

"For modelling purposes, we assume the financial impact from social unrest to continue for one quarter in 2020," they added.

-- Benny Kung and Suzannah Benjamin

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