NWS reported weak FY19 results, with shareholders’ profit -33% YoY, 10% lower than our forecast. Non-recurring items accounted for most of the weakness, and we expect core operating earnings to resume growth from FY20E onwards. A new progressive dividend policy and focus on core business bode well for valuation in the long run. We like NWS as a defensive yield play in the current interest rate down cycle.
- Profits have bottomed. FY19 AOP -10% YoY, mainly dragged by RMB depreciation, sell-down of BCIA (694 HK), non-cash MTM loss on interest rate swap contracts, and new management contracts in HKCEC. Net profit’s drop was exacerbated by a one-off remeasurement gain of BCIA in FY18. We expect the Company’s core business segments to post growth in AOP in FY20E. In addition, the pending acquisition of FTLife would lift AOP & net profit once completed.
- New dividend policy gives higher visibility. Up till 1HFY19, NWS had maintained a 50% payout on reported net profits, which were affected by one-off and non-operating items. From now on, the new dividend policy is to steadily increase or at least maintain the HKD value of ordinary DPS annually. We believe this would be well received by investors seeking stable income.
- Focus on Core Business. NWS has regrouped its business divisions into “Core Business”, which consists of Roads, Aviation, Construction and FTLife Insurance (upon completion), and the rest into “Strategic Portfolio”. Core Business contributed to 75% of AOP. This sends a clear signal to focus on business with sustainable long-term growth. Over time, we expect more acquisitions and investments in Core Business and disposals in Strategic Portfolio. We believe this would help narrow the stock’s conglomerate discount in the long run.
- Maintain BUY as a stable yield play. We believe the worst is over, with earnings bottoming out, new growth driver in Insurance business, and a progressive dividend policy. We cut forecasts on earnings and NAV, and TP to HK$15.50. Reiterate BUY.
