Bangkok Expressway

Bangkok Expressway Plc (BECL)

Investment thesis: We think expectations of strong 2Q12 earnings together with a forecast FY11-14 core profit CAGR of 27% will catalyze the share price. In addition, value additions from the planned Si Rat-Outer Ring Road Expressway Project (Sector B+) should prompt a consensus earnings upgrade, which would boost the share price further. BECL currently trades at an FY12 PER of 7.4x, a discount to its long-term average of 10x. Moreover, the FY12 dividend yield of 7.8% will support the share price.
Entering expressway high season: For the year to date, the firm has posted strong average daily traffic volume growth of 5.8% YoY to 1,076,059 trips. More interestingly, we are now entering high season for expressway use. Our study indicates that average daily traffic volume normally rises HoH in the second-half of the year, as there are fewer public and school holidays during the period. As such, we expect BECL’s 2H12 traffic numbers and core earnings to rise HoH.
Expect sustained traffic growth momentum: We anticipate that the firm’s traffic growth will continue, driven by an increasing numbers of vehicles on the roads. Domestic new car sales have expanded rapidly over the past few years. As such, we have revised up our traffic growth assumptions, which prompted us to increase our earnings forecasts by 2% to Bt2,730m for FY12 and by 4% to Bt2,140m for FY13.
Sector B+…a long-term growth driver: The Sector B+ project is due to start contributing revenues in 2017. It would mitigate the effect of BECL’s first concession not being renewed when it expires in 2020. We estimate that Sector B+ will contribute 7% additional traffic volume, on average, to the firm’s total traffic over the long-term. Based on those assumptions, we have upgraded our long-term earnings projection by 9%.
Share price outperformance to continue: The drivers of the share price outperformance are: 1) toll fee increases in 2013, 2) consensus earnings forecast upgrades (to reflect the value accretion from Sector B+) and 3) sustained strong traffic growth.
Outlook
High seasonal for expressway use: BECL posted strong YTD average daily traffic volume growth of 5.8% YoY to 1,076,059 trips, driven by increased demand for land transport in tandem with rising numbers of vehicles on the roads. More interestingly, we are now entering high season for expressway use. Our study indicates that average daily traffic volume normally rises in the second-half of the year, as there are fewer public and school holidays during the period. As such, we expect BECL’s 2H12 traffic numbers and core earnings to rise HoH.
Expect sustained traffic growth momentum: We anticipate that the firm’s traffic growth will continue, driven by an increasing number of vehicles on the roads. Domestic new car sales have expanded rapidly over the past few years. The 4Q11 flooding brought a temporary halt to new car sales, but they rebounded strongly once the waters receded. Toyota Motor (Thailand) forecasts domestic new car sales growth of 38% YoY to 1.1m units in 2012 and 9% YoY to 1.2m units next year.
As there is a strong positive correlation (67%) between new car sales and BECL’s traffic numbers, we expect the firm to post a strong traffic growth over the next few years. As such, we have revised up our traffic growth assumptions and earnings forecasts to factor in expanded expectations for expressway use (see Figure 3). We have upgraded our projections by 2% to Bt2,730m for FY12 and by 4% to Bt2,140m for next year.
Sector B+ (Si Rat-Outer Ring Road Expressway Project) …a long-term growth driver: In April 2012, BECL’s shareholders approved the company investing in the Si Rat-Outer Ring Road Expressway Project (Sector B+). The project still requires the approval of Cabinet. BECL is expected to sign a contract with the Expressway Authority of Thailand in 3Q12 for a Build-Transfer-Operate (BTO) project with a 30-year concession term. The total project value is estimated at Bt25,491m and the construction period will not exceed 48 months.
The Sector B+ project is due to start contributing revenues in FY17. It should mitigate the risk of the first of BECL’s concessions not being renewed when it expires in 2020. We estimate that Sector B+ will contribute 7% additional traffic volume, on average, to the firm’s total traffic over the long-term. Based on those assumptions, we have upgraded our long-term earnings projection by 9% and increased our YE12 target price by Bt3.  
Expect share price outperformance to continue: BECL share price has outperformed the SET by 42% in 2012 YTD, driven by expectations of strong traffic growth-fueled 2Q12 earnings, an extra gain from divesting a 16.67% stake in Southeast Asia Energy Co Ltd and news that the company will invest in the Si Rat-Outer Ring Road Expressway Project (Sector B+). We anticipate that the share price outperformance will continue, led by: 1) anticipation of toll fee rises in 2013 (from Sept 1, 2013 for the Chalerm Mahanakorn and Si Rat expressways and from Nov 1 for the Udon Rattaya Expressway), 2) consensus earnings forecast upgrades (once the contract for construction of Sector B+ is signed) and 3) sustained strong traffic numbers.
Note that there hasn’t been a toll fee increase since 2008; anticipation of that toll rise prompted the market to re-rate the stock to a PER of 13.5x in 2007, 1.5SDs above its long-term average of 10x. We expect the pattern to repeat this time around.
Recommendation and valuation
Maintain BUY with an increased YE12 target price of Bt32: We think expectations of strong 2Q12 earnings together with a forecast FY11-14 core profit CAGR of 27% will catalyze the share price. In addition, value additions from the investment in the Si Rat-Outer Ring Road Expressway Project (Sector B+) should prompt a consensus earnings upgrade, which would boost the share price further.
BECL currently trades at an FY12 PER of 7.4x, a discount to its long-term average of 10x. Moreover, the FY12 dividend yield of 7.8% will support the share price. We maintain our BUY rating with a revised up YE12 target price of Bt32 (inclusive of Bt3 from Sector B+ project), based on a sum-of-the parts valuation.