Hong Kong's MTR target price raised to 26.40 hkd - Merrill Lynch
HONG KONG (XFN-ASIA) - Merrill Lynch raised its target price on MTR Corp Ltd to 26.40 hkd from 23.60 and retained its ""buy"" call on the stock, citing its likely merger with the Kowloon-Canton Railway Corp (KCRC).
The brokerage said MTR's minority shareholders are expected to approve its merger with KCRC at its extraordinary general meeting (EGM) to be held next week on Oct 9.
Merrill noted that MTR's management had met many shareholders over the past few weeks to address their concerns about the merger.
One of the major concerns of minority shareholders is the new Fare Adjustment Mechanism (FAM) expected to be implemented after the merger.
Under the new FAM, transportation fare adjustments will be based on the fluctuation of consumer goods prices, standard of living, operating costs, public affordability and service quality.
But Merrill Lynch reasoned that while MTR would lose some flexibility under the FAM, its implementation should favor the company under the current inflationary environment by reducing the political difficulty it may face when applying for fare increases.
""We do not believe the fixed and variable payment arrangement would wipe off the incremental EBITDA (earnings before interest, tax, depreciation and amortization) accretion from the merger in the longer run as some argue"", the US house said.
""Overall, we still expect its minority shareholders to vote for the deal, serving as a catalyst for MTR's share price performance in the near term"", it added.
The investment bank also cited anticipated strong growth in MTR's retail operations, reflecting the strong retail market in Hong Kong.
It said this view was reaffirmed by the strong debut of Elements, MTR's 80 pct-owned new shopping mall located at Kowloon Station, which opened on Oct 1.
Merrill noted that Elements has effectively leased out all its rental spaces, mostly to premium brands targeting the high-end market segment.
""We expect the mall to attract more foot traffic from Tsim Sha Tsui, just like IFC did from Pacific Place in Admiralty"", it said.
Merrill Lynch also sees good value in MTR's property assets.
It noted that MTR's property assets are trading at a 24 pct discount to its NAV (net asset value), tipping MTR as ""a cheaper alternative to gain exposure to the Hong Kong property market versus some developers"".
MTR is 76 pct owned by the Hong Kong goverment. It is the second largest public transportation operator in the territory with a market share of about 24 pct.
It also has one of the largest property development landbanks along rail lines, with 20 mln square feet of gross floor area (GFA) to be tendered out, potentially providing 21,500 residential units.
Merrill noted that property development profit has been a key swing factor for MTR's earnings and has accounted for more than 66 pct of its EBIT (earnings before interest and tax) recently.
At 2.40 pm, MTR's shares were down 0.90 hkd, or 3.47 pct, at 25.05 hkd. 
HONG KONG (XFN-ASIA) - Merrill Lynch raised its target price on MTR Corp Ltd to 26.40 hkd from 23.60 and retained its ""buy"" call on the stock, citing its likely merger with the Kowloon-Canton Railway Corp (KCRC).
The brokerage said MTR's minority shareholders are expected to approve its merger with KCRC at its extraordinary general meeting (EGM) to be held next week on Oct 9.
Merrill noted that MTR's management had met many shareholders over the past few weeks to address their concerns about the merger.
One of the major concerns of minority shareholders is the new Fare Adjustment Mechanism (FAM) expected to be implemented after the merger.
Under the new FAM, transportation fare adjustments will be based on the fluctuation of consumer goods prices, standard of living, operating costs, public affordability and service quality.
But Merrill Lynch reasoned that while MTR would lose some flexibility under the FAM, its implementation should favor the company under the current inflationary environment by reducing the political difficulty it may face when applying for fare increases.
""We do not believe the fixed and variable payment arrangement would wipe off the incremental EBITDA (earnings before interest, tax, depreciation and amortization) accretion from the merger in the longer run as some argue"", the US house said.
""Overall, we still expect its minority shareholders to vote for the deal, serving as a catalyst for MTR's share price performance in the near term"", it added.
The investment bank also cited anticipated strong growth in MTR's retail operations, reflecting the strong retail market in Hong Kong.
It said this view was reaffirmed by the strong debut of Elements, MTR's 80 pct-owned new shopping mall located at Kowloon Station, which opened on Oct 1.
Merrill noted that Elements has effectively leased out all its rental spaces, mostly to premium brands targeting the high-end market segment.
""We expect the mall to attract more foot traffic from Tsim Sha Tsui, just like IFC did from Pacific Place in Admiralty"", it said.
Merrill Lynch also sees good value in MTR's property assets.
It noted that MTR's property assets are trading at a 24 pct discount to its NAV (net asset value), tipping MTR as ""a cheaper alternative to gain exposure to the Hong Kong property market versus some developers"".
MTR is 76 pct owned by the Hong Kong goverment. It is the second largest public transportation operator in the territory with a market share of about 24 pct.
It also has one of the largest property development landbanks along rail lines, with 20 mln square feet of gross floor area (GFA) to be tendered out, potentially providing 21,500 residential units.
Merrill noted that property development profit has been a key swing factor for MTR's earnings and has accounted for more than 66 pct of its EBIT (earnings before interest and tax) recently.
At 2.40 pm, MTR's shares were down 0.90 hkd, or 3.47 pct, at 25.05 hkd.
