NWS’s interim results for the six months ended 31 Dec 2020 (AOP +46% / EPS -60% YoY) were in line with the profit warning announced on 29 Jan. Core businesses’ AOP +13%, thanks to recovery in Roads and full-period contribution by Insurance. We revised AOP estimates by +9%/-16% in FY21E/FY22E, and fine-tuned target price to HK$13.70. Maintain BUY. NWS remains a good yield play with dividend yield at 6.6% and a progressive DPS.
- AOP +46% YoY, +172% HoH. With the exception of Construction which had a slower profit recognition in the period, all business segments were either stable or recovering strongly. Insurance made a full-period contribution vs. 2-month in 1H FY20. Roads enjoyed rapid traffic recovery. Strategic Investments, boosted by revaluation gains due to improved market condition, contributed to three quarters of the increase in Group AOP. Sequentially, AOP rebounded by 172% HoH from a pandemic-hit low base.
- Net Profit -60% YoY due to non-operating, non-cash items of HK$1,874mn, including 1) remeasurement loss of HK$1,330mn on reclassifying an investment to asset held-for-sale (we believe is Wai Kee in Construction segment); 2) provisions of HK$416mn by Goshawk Aviation, and 3) remeasurement loss of HK$128mn in disposing SUEZ NWS and Derun.
- Optimise business portfolio and recycle capital. NWS has exited Environment and Transport segments through disposals, streamlining its number of business segments from 9 to 7 and lowering net gearing from 31% to 26%. The Group continues to seek to unlock values in non-core assets.
- Future growth plan focuses on Roads, Insurance, modern Logistics. NWS had HK$11bn cash on hand and HK$18bn unutilised committed banking facilities. It targets to redeploy capital on acquiring Roads and modern Logistics assets (warehouse/cold chain/technology & VAS in China GBA and Southeast Asia), and growing FTLife with focus in GBA (will apply for PRC insurance license in near future).
- Maintain BUY, TP revised up to HK$13.70. We revised FY21E/FY22E AOP by +9%/ -16% and EPS by +14%/+8%, mainly reflecting stronger recovery in Roads, bigger contribution from Strategic Investments and slower profit recognition in Construction. We fine-tuned target price to HK$13.70, still based on 35% discount on FY21E NAV. After its share price has rebounded 52% from the trough in Sep 2020, valuations remain attractive, with trailing P/B at 0.69x, a pre-pandemic low. We believe NWS is a good yield play with a progressive DPS policy and dividend yield at 6.6% (close to pre-pandemic high).
- Potential catalysts: 1) HK-Mainland China border reopening post-COVID to boost FTLife and Facilities Management; 2) resumption of global travel after vaccine rollout would benefit Aviation; 3) further disposals of non-core assets; 4) acquisitions at attractive valuation; 5) China’s protective policies (still in discussion) to compensate for Roads’ toll-exemption in Feb-May 2020.
