As the interest rate reduction cycle approaches, non-cyclical high-yield stocks are expected to perform relatively well. The newly created core businesses such as toll roads and aircraft leasing bring strong cash flow and stable earnings to the company. Although fiscal 2019 profit is expected to decline compared with the same period last year, we estimate that the company's operating profit has bottomed out and will return to its long-term growth trend. Management attaches importance to the company's growth, further sales of non-core assets and successful integration of the insurance business will lead to a revaluation. The buy rating is covered for the first time, with a target price of HK $19.02.
Profits hit bottom and rebounded. NWS will report fiscal 2019 results in September 2019 (the end of June), and we expect earnings per share to decline 25.9% year-on-year due to a number of short-term factors. Benefiting from the new growth drivers, we estimate that the company's operating profit attributable to the company will grow at a compound annual rate of 12.1% in the 2019-21 fiscal year. If we take into account the Fortis acquisition projects that are waiting for regulatory approval, the profit growth will be even more significant.
Focusing on the core business helps to revalue. NWS has sold non-core assets more frequently in recent years and shifted to investing in businesses with more growth potential. We agree with the company's policy direction that further restructuring of assets and focusing on core businesses (roads, aircraft leasing, insurance) will help to improve earnings forecasts and valuations.
Catalyst: M & A drives growth. NWS has plenty of net cash and the net debt ratio will remain healthy even assuming the Fortis acquisition has been completed. With a business with strong cash flow and the possibility of selling more non-core assets in the future, NWS has enough ammunition to make more mergers and acquisitions to drive growth.
The company is reviewing its dividend policy. The company's current dividend ratio of 50% of net profit is affected by one-time and non-operating items. If the dividend policy remains unchanged, dividends per share are expected to fall with net profit in fiscal 2019, undermining its attractiveness as a high-interest defensive stock. Management is considering other options and a new policy that provides a stable and predictable dividend per share is expected to be welcomed by investors.
The share price is discounted by 36% to net asset value. According to the classified plus total valuation method, we get a net asset value of HK $23.76 per share, which is a 36% discount to the company's current share price. Based on the assumption of a 20% discount on net asset value, our target price is HK $19.02, plus the forecast annual dividend of HK $0.58, the potential total return is 28.1%.