NWS announced on January 12, 2021 that it had agreed to sell key assets of its environmental business at HK $6.533 billion.
We believe that the transaction is beneficial to the startup because 1) the operating profit attributable to the environment business (AOP) declined in the 18-20 fiscal year; 2) the exit valuation is much higher than the market average and helps to increase the company's net asset value; 3) the release of funds to redeploy to the core business and other higher growth opportunities; 4) streamlining the business helps to reduce the holding company discount. Maintain the buy rating, fine-tune the NAV forecast and target price to HK $13.12.
Withdraw from non-core business at a good valuation. NWS has agreed to sell its entire stakes in Suez NWS, the two main parts of its environmental business, and Chongqing Derun, to its long-term partner Suez. The price is equivalent to 17.9 times and 16.0 times the price-to-earnings ratio of Suez NWS and Deloitte in fiscal year 20, well above the industry average. We believe that the transaction will increase the newly created net asset value as we estimate that the combined net asset value of the two businesses in fiscal year 21 is only HK $4.8 billion.
Consistent with the strategy of focusing on core business and high-growth business. The sale is in line with the newly created strategy of optimizing the business portfolio, focusing more on core businesses (roads, insurance, aviation, construction) and exiting non-core businesses when opportunities arise. In recent years, the Group has sold its Hong Kong bus business, Tianjin Port and Beijing Capital International Airport (694 HK), and reduced its interest in the new ferry.
Free up funds for new investments (such as toll roads). We estimate that after the sale, the net debt-to-equity ratio for the newly created fiscal year 21 will fall from 24 per cent to 12 per cent, well below the 30 per cent ceiling set by management guidelines, while cash on hand will increase from HK $14.8 billion to HK $22 billion.
Maintain the buy rating with a target price of HK $13.12. We have lowered our earnings per share forecasts for fiscal year 21 by 6.0% to 9.8% respectively to exclude the contribution of disposed assets, while conservatively assuming that there is no new investment. The target price is slightly adjusted from HK $12.78 to HK $13.12, still based on a 35% discount on projected net asset value for fiscal year 21. The share price has rebounded 35% since our last report in October 2020, and the valuation is still very attractive, with a price-to-book ratio of 0.67 (pre-epidemic low), dividend yield of 7.3% (near pre-epidemic peak), and a 60% discount to projected net asset value for fiscal year 21.
Potential catalysts: further disposal of non-core assets; spin-offs (such as aviation); acquisitions attracted by valuations (such as toll roads); protective policies for toll roads in China (still under discussion), to compensate for road toll exemptions from February to May 2020; the reopening of the border between China and Hong Kong and the lifting of travel restrictions will boost Fortis growth.