NWS Holdings (0659.HK) In line with expectations: Better growth in FY15; still looking at M&As

What surprised us

Excluding a one-off restructuring gain of HK$594mn at Xiamen port, NWS’core net profit grew 2% yoy to HK$3.64bn in FY14, broadly in line with ourexpectations, with lower profit in the water and facilities mgmt. businessoffset by better performance at the construction division. Affected byimpairment and forex loss at Chongqing Water Group, AOP (attributableoperating profit) from the water business dropped 26% yoy in 2H14 (vs. +7%in 1H) despite a 13% yoy rise in treatment volume. Without the unfavorablecomps from Duty Free concession expiry at HK Airport, AOP from facilitiesmgmt. still declined 6% yoy in 2H14 due to higher rental expenses at Lo Wusince January. On the other hand, contracting AOP grew 36% yoy toHK$279mn in 2H14 (vs. HK$153mn in 1H), helped by better margin andconstruction progress. NWS declared a final DPS of HK$0.22, adding up toHK$0.58 for FY14, implying 50% payout.

Key takeaways from the briefing: (1) Looking into FY15, mgmt expectsbetter earnings growth. We forecast 7% yoy (vs. +2% in FY14), with a fullyearcontribution from Beijing Airport (694.HK, Neutral, Sept 23 HK$5.83) vs.

7-mos. in FY14, completion of expansion work at Tangjin Expressway byDec 2014, and without the drag of a one-off impairment in the waterbusiness, partly offset by less energy earnings after the Macau Powerdisposal; (2) Net debt to equity remained low at 23% at end-FY14, or 18% ifwe include cash proceeds from the disposal of Macau Power. Mgmt remainsinterested in M&A opportunities in infrastructure like toll roads and water.

What to do with the stock

Factoring in higher rental expense at Lo Wu, we cut 2015-17E EPS by 1-3%.

Rolling over NAV to FY15E, our 12-m NAV-based TP rises to HK$12.5 (fromHK$12) based on unchanged discount of 25%. Maintain Sell. Key risks:Sizeable value-accretive acquisitions.