Action
Despite solid earnings, Beijing Enterprises Holdings’ (BEHL) share price has been pressured over the past several years due to falling payout ratio. Its share price underperformed the market index by 20ppt over the past 12 months. We expect BEHL’s 2019 payout ratio to turn around and rebound for the first time in recent years, driving a valuation recovery. We upgrade BEHL to OUTPERFORM from NEUTRAL and raise the target price 22% to HK$45.
What’s changed?
Valuation close to historical lows; downside risk fully priced in.BEHL is trading at 0.6x 2020e P/B and 5.3x P/E, close to historical lows. We think the current valuation fails to factor in corporate fundamentals; thus, we expect valuations to increase.
2019 payout ratio to turn around and increase for the first time in recent years. We expect BEHL’s 2019 payout ratio to turn around and reach 20%, and gradually recover in the next years.We estimate the payout ratio could reach or exceed 30% in the future, boosting valuation.
Excessive discount for conglomerate valuation; BEHL remains a typical city gas company.
SJ Line to contribute stable profit and cash flow in the coming years.
How do we differ from the market? We differ in our forecast of the turnaround in payout ratio, and we are more upbeat on the SJ Line.
Potential catalysts: 2019 earnings announcement.
Financials and valuation
Our 2019-2020 EPS forecast is unchanged, and we introduce 2021 forecast at HK$7.57. We estimate a rising payout ratio and solid fundamentals will enhance valuations. We raise 2019-2020 target P/E 22% and 22% to 7.2x and 6.5x, and lift the target price 22% to HK$45 (23% upside). We upgrade BEHL to OUTPERFORM from NEUTRAL.BEHL is trading at 5.8x and 5.3x 2019-2020e P/E.
Risks
Disappointing gas volume for heating in Beijing due to warming weather.