Nomura upgrades Swire Pacific, but remains downbeat on its prospects

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Nomura upgraded Swire Pacific to Neutral from Reduce, but kept a fairly downbeat view on its prospects.

“We believe Swire Pacific’s share is unlikely to be re-rated materially, owing to earnings growth headwinds, lacklustre value
creation track record and its holding-company structure,” Nomura said in a note on Friday. “We also see limited dividend growth.”

But it said that it expected earnings likely hit a trough in 2017, with recovery in some businesses, which meant a Neutral rating better reflected its forecast for earnings to normalize to HK$8.65 billion in 2019, around the average earnings for the 2009-2015 period.

Uncertain earnings outlook

“While this normalisation should be driven by the aviation division’s reduced oil hedging losses and the property division’s continued stable growth, the earnings recovery outlook for the rest of its businesses is less certain,” Nomura said. “The flat dividend per share (DPS) declared at 2017 results, while in line with our/consensus expectations, is not particularly encouraging since its dominant division, Swire Properties, did increase its DPS by 8 percent.”

Nomura raised its 2018-19 recurring earnings per share (EPS) estimates by 8-20 percent, mainly on higher aviation division forecasts and the latest Swire Properties forecast.

Hikes target 17 percent

It raised its Swire Pacific target to HK$83.90 from HK$71.70.

Nomura also noted that Swire Pacific’s valuation of a 26 percent net asset value (NAV) discount and a 3 percent dividend yield for 2018 aren’t compelling compared with peers. For example, Wheelock & Co. has a 40 percent NAV discount, the note said.

Within the Swire group, Nomura said it preferred Swire Properties, and among Hong Kong conglomerates, it preferred Wheelock, which it rates at Buy with a HK$73 target.

“In terms of earnings and cash flows visibility, Swire Properties remains the strongest among group companies, while structural challenges persist at some other divisions including marine’s overcapacity and beverage’s profit margin pressure in China,” the note said.

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