NWS’s interim earnings for the six months ended 31 Dec 2019 declined (AOP / EPS -6% / -34% YoY) and missed our estimates by 16% / 7%, mainly dragged by non-core segments. Interim DPS maintained at HK$0.29. Earnings recovery will be delayed by COVID-19 which significantly hit Roads segment. Expect strong recovery in FY21 on low base and full-year contribution from FTLife.
- Core Business maintained growth. All of the Core Business segments posted growth in 1H20, and the newly acquired FTLife contributed to 7% of Group’s Attributable Operating Profit (AOP) in just two months. Core Business accounted for 89% of AOP in 1H20, up from 75% in FY19.
- Non-core business deteriorated. The significant drop in earnings was mainly from Strategic Portfolio (non-core), among which Facilities Mgmt’s negative AOP widened by 148% to HK$364mn, or -16% of Group’s AOP. Free Duty suffered badly from challenging tourism and retail environment in HK.
- COVID-19 to hurt 2H20E earnings. The COVID-19 outbreak in Jan 2020 will put Facilities Mgmt under further pressure, and cause significant drop in AOP of the core Roads segment. Therefore, the Group’s earnings recovery will be delayed to FY21E instead of FY20E as forecasted before the virus outbreak.
- Long-term prospects intact. Expect Roads to return to normal once the outbreak is under control (and Facilities Mgmt to recover more gradually). On the plus side, virus outbreak might present M&A opportunities at distressed valuation, e.g. in toll roads. The management mentioned renewable energy and data centre as other possible targets.
- Potential catalysts: 1) China’s protective policies to compensate for Roads’ toll exemption; 2) spinoff (e.g. aviation); 3) disposals of non-core assets such as Transport; 4) acquisitions at attractive valuation; 5) share buyback.
- Maintain BUY, TP cut to HK$13.00. We revise FY20E AOP / EPS by -13% / -15%, and NAV by -1.1%. TP is cut from HK$14.06 to HK$13.00, based on 25% discount to FY20E NAV (vs. 20% before). A larger discount reflects lower economic forecasts of China & HK economic growth and wider discounts in other conglomerates’ valuation. Trading at 0.76x P/B, a historical low, it remains an attractive yield play with 6.3% FY20E dividend yield.
