NWS Holdings announced that its acquisition of FTLife Insurance was completed on 1 Nov 2019. Consolidating FTLife into NWS’s financial statements would, by our estimates, lift NWS’s EPS in FY20E / FY21E by 14% / 25%, which would represent 7% / 24% YoY growth respectively.
- Key reasons for the growth acceleration in Oct: First, the elimination of NES III remained a key driver as local governments continued to enforce the elimination of NES III trucks. Second, demand for logistic trucks continued to increase driven by transportation of coal and other commodities. Lastly, the collapse of bridge in Wuxi due to truck overloading in Oct triggered more demand for HDT.
- Acquisition completed, in line with guidance. NWS’s acquisition of FTLife Insurance was completed on 1 Nov 2019. Upon completion, FTLife became an indirect wholly-owned subsidiary of NWS, and since then the financial statements of FTLife are consolidated into NWS. NWS entered into an agreement on 27 Dec 2018 to acquire FTLife. NWS’s management has stated for a number of times that they expected the acquisition would complete by 4Q19. Although well expected, the completion removes any overhang and should provide some re-rating momentum for NWS.
- Immediately lift NWS’s earnings. NWS would consolidate FTLife’s earnings for 8 months in FY20E (year end June), and for full year thereafter. FTLife’s net income was HK$1,228mn in 2018, equivalent to 32% of our old forecast of NWS’s FY20E shareholders’ profit. After taking higher finance costs into account, we estimate that FTLife would lift NWS’s EPS in FY20E / FY21E by 14% / 25%.
- Gearing still healthy, can support progressive dividend. We estimate that NWS’s net gearing rose from zero to 31% post-acquisition, still under management’s target of <35%. Given the Company’s strong-cash-flow businesses, we believe it can deliver its progressive dividend policy announced in Sep 2019.
- Other potential catalysts: NWS is placing more emphasis on its Core Businesses (roads, aircraft leasing, construction and insurance). Any acquisition in these core businesses to drive earnings growth or disposal of non-core businesses (Strategic Portfolio) would probably help its valuation.
- Maintain BUY as earnings bottom out. Having reported a 33% drop in net profits in FY19, NWS’s earnings recovery will be given a strong boost by FTLife. We slightly adjusted NAV forecast, and TP to HK$15.4 based on 20% discount to FY20E NAV. Reiterate BUY.
