BTS Group Holdings

BTS Group Holdings Plc (BTS)

What’s new? BTSC, a subsidiary of BTS, and Krungthep Thanakom Co Ltd, a firm established by the Bangkok Metropolitan Administration, yesterday signed a 30-year long-term operation & maintenance contract (O&M contract) for the Bangkok Mass Transit System.
Under the O&M contract, BTSC will operate and maintain the Bangkok Mass Transit System until 2042. The Bangkok Mass Transit System covers the original 23.5km concession network (after concession expiry on Dec 4, 2029), the Silom extension (Saphan Taksin-Wongwian Yai & Wongwian Yai-Bang Wa; 7.5km), and the Sukhumvit extension (On Nut-Bearing extension; 5.25km). BTSC plans to procure an additional 100 carriages over the next 30 years to ensure sufficient train availability.
No more short-term contract renewal risk: This long-term O&M contract will replace the previous short-term and one-year O&M contracts with Krungthep Thanakom to operate the Silom and Sukhumvit extensions. As such, short-term contract renewal risk has ended.  
Secure long-term income streams: The contract covers the period from May 8, 2012 to May 2, 2042, entitling BTSC to annual fee income, payable monthly, from Krungthep Thanakom over a 30-year period. The nominal value of the 30-year O&M contract is about Bt188bn with an estimated lump sum fees of Bt1.8bn for the Silom and Sukhumvit extensions in FY2014/15 and of Bt6.5bn for the original network in FY2030/31 (post the concession expires). For its part, the BMA will be entitled to all farebox revenue. The 30-year O&M contract will provide BTS steady long-term income streams.
Long-term profit forecast & target price upgrades: We estimate that this 30-year O&M contract will boost BTS’s long-term earnings by about 18% per year. Because of the contract, our sum-of-the-parts end-March 2012 target price rises another Bt0.36/share to Bt1.27.
Action: This news should boost sentiment toward the stock, as it will create significant long-term value. In addition, we think that sustained strong ridership growth together with media business expansion will catalyze the share price performance. BTS’s impressive core earnings CAGR of 36% for FY12-14 should eventually prompt a valuation re-rating. Moreover, the firm’s bottom-line profile is resilient to a weakening global economy. The stock valuation is undemanding—an end-March PBV of only 1.2x, deeply discounted to BMCL’s 9.2x and the regional mean of 2.4x.