Bank of America Securities initiates coverage on gas with an "Underperform" rating; improved earnings prospects still difficult to cover dividends

Bank of America Securities published a research report stating that it has initiated coverage on HK & CHINA GAS (00003.HK) with an "Underperform" rating and a target price of HKD 6.5. Although the group's profit outlook has improved this year due to a decrease in gas costs, it believes that its free cash flow is still insufficient to cover dividends, and that dividends can only be maintained at a stable level in the coming years.

Bank of America Securities also indicated that the group's restructuring measures may not provide much help in the short term. Given the challenging market environment and a weaker dividend outlook compared to peers, the company's current dividend yield of approximately 4.9% is similar to other Hong Kong utility companies and is not attractive to the bank.

Bank of America Securities' net profit forecasts for 2025 to 2027 are 4% lower than the market consensus, predicting free cash flow during the forecast period to be between HKD 3.5 billion and HKD 4.7 billion, which is still insufficient to pay the HKD 6.5 billion in dividends. It also believes that the likelihood of the company increasing its dividend per share is remote, which will limit the potential for the stock price to outperform the market