News Analysis: Early termination of concession to operate and manage Stockholm Pendeltåg
- One-off provision of HK$700m will be recognised in FY23
- Mälartåg regional traffic facing similar operational challenges
- Reiterate BUY with HK$45
MTR Pendeltågen AB’s assignment agreement with AB Storstockholms Lokaltrafik (“SL”) to operate and manage Stockholm Pendeltåg will be terminated earlier on 2 Mar 2024 and handed over to a new operator. Recall that in Dec-15, MTRC, through its wholly owned subsidiary, MTR Nordic AB, was awarded the concession to operate and manage Stockholm Pendeltåg for 10 years commencing Dec 2016.
Operated by MTR Pendeltågen AB (a wholly owned subsidiary of MTR Nordic AB), Stockholm Pendeltåg connects Sweden’s capital city with surrounding county areas. It comprises of four rail lines with a total length of 247 km serving 54 stations. The early termination, however, was not totally unexpected. Stockholm Pendeltåg has been in red due to ongoing operational challenges, including the shortage of operational staff such as local drivers and maintenance issues in 2022 and 1H23 respectively.
MTRC estimates that it will need to make a provision of c.HK$700m in FY23, which represents 11% of our profit forecast. This comprises of 1) an exit fee of c.HK$196m to compensate SL’s additional cost arising from early termination; 2) provisions for certain inventory, spares and assets handed to the new operator on the termination date for free; and 3) a provision for wind-down costs and certain assets that will need to be written off. Elsewhere, MTR Pendeltågen AB should pay MTR c.HK$210m to settle other outstanding issues related to operation and management of Stockholm Pendeltåg, which has already been provided for.
Besides, Mälartåg’s regional traffic, another rail business in Sweden, is also facing similar challenges. The company will try to improve the financial performance of this business. A provision may be required if the issues cannot be resolved.
In the previous three months, share price of MTRC has fallen 18%, underperforming the broad market by 3ppts. Meanwhile, the stock is trading at 40% discount to our appraised current NAV, near the low end of its historical trading range. Negatives surrounding the counter should have been largely priced in following share price correction. We maintain our BUY call with HK$45 TP.