NWS announced annual results for the year ended 30 Jun 2020. While EPS slumped by 94% and missed due to impairments, Attributable Operating Profit (AOP) dropped by only 25% and beat our forecasts by 8% thanks to Roads’ recovery. We have no doubt that the worst is over and both EPS and AOP have hit rock bottom. Maintain BUY, fine-tuned NAV forecasts and TP to HK$12.78.
- Earnings missed due to impairments. NWS’s FY20 profit attributable to shareholders slumped by 94% to HK$253mn, lower than our street-low estimate HK$907mn, primarily due to HK$1,709mn of impairment losses and provisions on various business segments. AOP was HK$3,514mn, 8% higher than our estimate, as Roads’ recovery exceeds expectations.
- Roads’ recovery well on track. After the PRC toll-exemption policy between 17 Feb and 5 May 2020, NWS’s Roads business has been recovering strongly, with its overall traffic volume +3% YoY in Jun (incl. one newly acquired road), and toll fee income almost reached the same level as Dec 2019. Negotiations with the PRC government on “protective measures” to compensate for toll-exemption policy are still underway. We believe the more likely measures would be extension of concession period, which would not help short-term profits but lift segment NAV.
- Insurance contributed to 21% of AOP in just eight months. NWS completed the acquisition of FTLife on 1 Nov 2019, and in just eight months FTLife contributed HK$750mn to the AOP. Despite the fact that business from Mainland Chinese visitors was severely hit by the pandemic-induced border closure, FTLife’s Annual Premium Equivalent in 1H 2020 decreased by 12% YoY only, outperforming the HK industry’s 44% slump. We believe FTLife will maintain superior growth thanks to its strategy to capture the GBA market and synergies with other business segments (e.g. Gleneagles Hospital).
- Earnings hit rock bottom. The COVID-19 is still seriously affecting Facilities Management and Aviation segments, but with a strong recovery in Roads, full-year contribution from FTLife, and relatively stable Construction and Logistics businesses, we expect NWS’s AOP and EPS to rebound strongly in FY21. We forecast that AOP will grow by 28% CAGR from FY20-23.
- Delivering progressive dividend, current yield ~10%. NWS adopted a “progressive DPS” policy since a year ago. Despite a slump in EPS, NWS maintained FY20 full-year DPS at HK$0.58. With earnings recovery in sight, net gearing kept at healthy levels (31% vs. 30% in Dec 2019), and ample cash on hand (HK$3.4/share), we believe NWS can comfortably raise its DPS from FY21 onwards. Current yield at record-high 9.8% (vs.10-year average 5.2%).
- Maintain BUY, TP fine-tuned to HK$12.78. We adjusted FY21E / 22E EPS forecasts by -17% / -15%, mainly reflecting prolonged impact by COVID-19 and slower project recognition in Construction. AOP is slightly revised down by 6% / 2%. We fine-tuned our TP from HK$12.90 to HK$12.78, still based on 35% discount to FY21E NAV. The stock is trading at distressed levels, 0.50x trailing P/B which is 3 s.d. below 10-year average, and 70% discount to our NAV forecast.
- Potential catalysts: Further disposal of non-core assets; spinoffs (e.g. aviation); acquisitions (e.g. toll roads) at attractive valuation; China’s protective policies (still in discussion) to compensate for Roads’ toll-exemption in Feb-May 2020; HK-China border reopening and travel restriction lifting which would drive recovery in Free Duty and growth in FTLife.
