NWS issued a profit warning on 19 Jun, expecting a significant YoY drop in profit to shareholders in FY20 ending 30 Jun, without giving concrete numbers. We believe this has been largely priced in, and maintain BUY with TP slightly lowered to HK$11.90, but note that the stock may lack re-rating catalysts in the short term.
- Profit decline mainly due to COVID-19. NWS attributed the expected drop in profit to 1) no toll fee income during 17 Feb to 5 May 2020 due to PRC policies in the wake of COVID-19; 2) ridership in HK bus services substantially reduced; 3) Facilities Management's (HKCEC and duty free shops) revenue significantly declined due to persistent travel restrictions and prohibition on group gathering; 4) provisions or impairments in various business segments in view of the current low interest rate and adverse economic environment.
- Not surprising and largely priced in. We believe the negative factors mentioned in the profit warning have already been well noted by investors. Since the announcement of toll fee exemption by PRC Ministry of Transport on 15 Feb 2020, NWS's share price has slumped 32% (underperformed HSI by 21 ppts). This has priced in a big drop in FY20E earnings, in our view.
- Reiterated progressive dividend policy. Management stressed that the Group’s liquidity and cashflow remain healthy and sound, with >HK$14bn unutilized committed banking facilities, and expected to maintain its existing sustainable and progressive dividend policy.
- Maintain BUY, TP slightly cut to HK$11.90. We slightly lowered our FY20E EPS & FY21E NAV forecasts by 1-2%, and accordingly trimmed our TP to HK$11.90, based on 25% discount to FY21E NAV. We expect overall business to gradually return to normal when the COVID-19 is under control. It remains an attractive yield play with 8.3% dividend yield.
- Lack short-term catalysts: Spinoffs (e.g. aviation), disposals of non-core assets, and acquisitions at attractive valuation are the potential long-term catalysts, but with the uncertainties in business environment due to COVID-19, chances of these catalysts materializing may have diminished. The one catalyst investors are looking forward to is China’s protective policies to compensate for Roads’ toll exemption.
