NWS announced on 12 Jan 2021 that it has agreed to dispose of major assets in Environment segment for HK$6,533mn. We believe the deals are positive to NWS because 1) Environment’s AOP has been declining in FY18-20; 2) exit valuation is much higher than market average, and is NAV-accretive; 3) free up capital to redeploy in Core segments and other higher-growth opportunities; 4) streamlining business should help narrow the discount of holding company. Maintain BUY, fine-tuned NAV forecasts and TP to HK$13.12.
- Exiting a non-core business at good valuation. NWS has agreed to sell its entire equity interests in SUEZ NWS and Chongqing Derun, which are the two major parts of the Group’s Environment segment, to its long-term partner SUEZ. The considerations implied 17.9x and 16.0x FY20A P/E on SUEZ NWS and Derun respectively, which are higher than industry average. We believe the deals are NAV-accretive, as we estimate the combined FY21E NAV of the two businesses to be HK$4,800mn only.
- In line with strategy to focus on Core and higher-growth businesses. The disposals are in line with NWS’s strategy of optimizing its business portfolio, putting more focus on Core segments (Roads, Insurance, Aviation, Construction), while exiting non-core businesses when opportunities arise. The Group has disposed of bus business in HK, ports in Tianjin, BCIA (694 HK) and reduced stakes in New First Ferry in recent years.
- Free up capital for new investments (e.g. toll roads). We estimate that, after disposals, NWS’s FY21E net debt-to-equity ratio would drop from 24% to 12%, much lower than the 30% cap guided by the management, while cash on hand would increase from HK$14.8bn to HK$22.0bn.
- Maintain BUY, TP at HK$13.12. We adjusted FY21E / 22E EPS forecasts by -6.0% / -9.8%, taking away contributions from the disposed assets, while conservatively assuming no investment from the proceeds. Fine-tuned TP from HK$12.78 to HK$13.12, still based on 35% discount to FY21E NAV. After a 35% rebound in share price since our last report in Oct 2020, valuation is still very attractive, with 0.67x trailing P/B (pre-pandemic low), 7.3% dividend yield (close to pre-pandemic peak), and 60% discount to FY21E NAV.
- 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 growth in FTLife.
