FY20 net profit -15% yoy on construction revenue decline but operation revenue remained solid
Water treatment projects revenue to recover, while expect comprehensive project construction revenue to fall 10-20% in FY21E
Shifting to asset light model improves cash flow and gearing ratio, maintain BUY; nudge down TP to HKD3.5
FY20 results below expectation
BEW FY20 net profit fell 15% yoy to HKD4.2bn, missing market and our estimates by 10%/15%. Revenue declined 10% yoy to HKD25bn on drop in construction revenue (BOT and comprehensive renovation projects) -26% yoy as BEW scaled down its heavy asset exposure in comprehensive renovation projects, while BOT construction projects progress was affected by the pandemic. GPM rose 2.3ppt in FY20 to 38.4% on higher margin operation revenue share (48% in FY20 vs. 37% in FY19). FY20 net gearing improved to 101% (vs.114% in 1H20). BEW declared final dividend of HKD 0.078/ share, adding up to HKD 0.162/share for FY20, implying payout ratio of 39% or 5.5% dividend yield.
Water projects revenue growth will recover in FY21E
Given construction work progress has resumed normal, plus a target to secure additional 3mn ton/day water treatment projects (waste water and water supply), management guides its BOT construction revenue to grow 5-10% yoy in FY21. On the other hand, tariff hike and new projects commencing operation will support mid-teen growth in BEW’s water treatment operation revenue in FY21E.
Comprehensive construction revenue to see further decline
Most of its previously heavy assets comprehensive renovation projects are near the end of their construction cycle, so management sees decline of 10% to 20% in this segment’s revenue in FY21E, but these projects will begin to generate operation revenue in the future.
Favourable shift to asset light model, maintain BUY
We cut our FY21E/FY22E net profit by 8%/5% on lower construction revenue, and nudge down our TP to HKD3.5, implying 7.4x/6.6x FY21E/FY22E P/E. We maintain BUY on the stock, as BEW continues to transform its comprehensive renovation projects away from heavy asset model, which is positive on its gearing in long-term (FY21E net gearing lowered to 106% vs 126% previously), and improving operating cash flow.