The Ministry of Transport of the PRC announced that effective from 17 Feb, until the end of the prevention and control measures taken by the government over COVID-19, all vehicles that travel on toll roads will be exempted from toll fee, in order to facilitate the resumption of business and production and to sustain economic growth.
- Roads/overall AOP to drop by 54%/17% in FY20E in base case. Having considered the impact of COVID-19 and toll fee exemption, in our best/base/worst case scenarios, we estimate that NWS’s Roads segment’s attributable operating profit (AOP) would drop by 31%/54%/86% in FY20E, and overall AOP would drop by 10%/17%/28%.
- Expect protective policies to mitigate the impact. MoT’s announcement stated that it would consider launching “relevant ancillary protective measures to protect the rights of toll roads users, creditors, investors and operators”. We believe possible protective measures include government subsidy or tax rebate to toll roads operators, extending toll roads’ concession rights, and interest rate cut on their bank loans or extension of loan repayment. We have not factored in any protective measures into our model.
- Balance sheet remains strong. Despite the fact that toll fee exemption would hurt cash flow of NWS, its balance sheet would remain strong even after splashing out HK$21.5bn to acquire FTLife in 2019, with ample cash on hand and healthy net gearing (we estimate cash to be HK$8.4bn and net gearing 33% as at 30 Jun 2020) and unutilised committed banking facilities (HK$12.4bn as at 30 Jun 2019).
- Committed to progressive dividend policy. In the annual results announcement in Sep 2019, NWS announced a new progressive dividend policy, i.e. to steadily increase or at least maintain the HKD value of ordinary DPS annually. NWS reiterated in its announcement on 17 Feb to maintain its existing sustainable and progressive dividend policy.
- Maintain BUY as a yield play. We revise down TP from HK$15.40 to HK$14.06, based on 20% discount to FY20E NAV. COVID-19 will adversely impact NWS only in the short term. Long-term fundamentals are intact. NWS remains an attractive yield play, with 5.7% FY20E dividend yield.
