NWS Holdings—With Special Dividend, Will it Bring Any Hidden Worries to Bond Investors?

On 27 Feb, NWS Holdings ("NWS") announced its results for the first half of FY2024. The Group also declared a special dividend of HKD 1.79 per share (the same below), which, together with the interim dividend of HKD 0.3 per share, amounted to a total of HKD 2.09 per share (a dividend payment of around HKD 8.17 billion), which translates into a dividend yield of 32.6% (based on the closing share and dividends paid over the past 12 months), which is a very high level. This should surprise the shareholders.

Indeed, the special dividend is welcomed by the market. The NWS shares surged 19% to HKD 8.77 in the next day. The special dividend was unexpected by the market. However, a high dividend payment is not favourable to creditors. It could affect NWS’s credit performance, as NWS will have much less cash on hand, and it will also lead to a decline in total equity.

Besides, as expected, NWS exercised its call option to redeem the perps “NWSZF 5.750% Perpetual Corp (USD)” in January, with the principal amount of around USD 1.02 billion.

As shown in Table 1, NWS's credit metrics are still strong even if we take into account incoming dividend payments (special dividends and interim dividends) and redemption of perpetual bonds. Although its net gearing ratio and net debt/adjusted EBITDA increased to 59.7% and 3.0x respectively, its overall leverage is still under control. In particular, the net debt/adjusted EBITDA of only 3.0x is reassuring to creditors. After repayment of the perpetual bonds with a higher coupon, the Group's interest coverage ratio will rise to 6.0 times, demonstrating a strong interest payment ability.

Table 1: NWS Holdings’s Credit Indicators

Of course, after the cash significantly reduces to HKD 4.0 billion, if the Group needs funding for an operation or new investment, it could have slight pressure. However, NWS still has an undrawn credit facility of HKD 10.3 billion available for operation or refinancing, reflecting the Group’s decent liquidity. We also mentioned that NWS has a high visibility of the business cash flows (investors can refer to “Idea of the Week: NWS Holdings—Probably Acquired By Parent Company and Lays Golden Eggs”). The Group’s overall default risk is still low.

As a result, in the first half of FY2024, NWS’s adjusted EBITDA increased 44% YoY to HKD 3.72 billion. With the full relaxation of COVID restriction policies and normalization after COVID, the road and insurance segments had a strong growth, and the facility management segment turned losses into profits. With the Group’s stable business models in most of the segments, it has a higher visibility in profits and cash flows. We believe that NWS’s operating and credit performance will be as solid as ever.

Besides, NWS’s management, Cheng Chi Ming, stated that the Group’s business segments can be available for a spin-off, but these are subject to the actual market conditions. Considering that the current market conditions are not very decent, the Group will not rush to carry out the spin-off. These potential spin-offs (e.g. FTLife Insurance, Hip Hing Construction Group, etc.) would also be a potential source of liquidity for the Group.

Thus, bond investors do not need to worry about NWS’s high dividend payment. The NWS’s bond, NWSZF 4.250% 27Jun2029 Corp (USD), still has a yield to maturity of 7.2%. Investors who seek a stable return could consider this bond.

On a side note, NWS's major shareholder is Chow Tai Fook Enterprises, which will receive a dividend of up to HKD 6.36 billion, which strengthens its financial position. It could be beneficial to NWS and New World Development. In the event of a liquidity crunch (again, we have to emphasize that the credit profiles of both companies remain healthy), the Group could replenish funds through rights issues or shareholder loans, which depend more on the financial position of the major shareholder. The better the financial position of the major shareholder, the more likely for the major shareholder to provide capital for the company to overcome the challenge.