BTS Group Holdings

BTS Group Holdings Plc (BTS)
Investment thesis: We think that the listing of VGI Global Media Plc (VGI) will act as a near-term catalyst for BTS’s share price. In addition, expected strong earnings growth momentum in 2Q12/13 and through the year should boost the stock price going forward. Overhanging concerns over the dilution effect of the conversion of convertible bonds (CBs) may weigh down stock sentiment in the short-term, but we expect those concerns to soon ease, as the investor put option date (Jan 25, 2013) is approaching and we believe that most CB holders will choose to sell the bonds back to BTS.
Valuation-wise, the stock is undemanding—an end-March 2013 PBV of only 1.4x, deeply discounted to BMCL’s 9.1x and the regional mean of 2.4x.
Extra gains from sales of VGI shares expected in 3Q12/13: As BTSC, a subsidiary of BTS (96.4% stake), will sell 62m shares in VGI (BTSC currently holds 100%) through an IPO, we expect BTS to book capital gains from the divestment in 3Q12/13 (Oct-Dec). Assuming an IPO price range for VGI shares of Bt30-35, the expected capital gain would be Bt1,252-1,624m (see Figure 1). That would more than double the FY12/13 net profit from our current forecast.
Earnings contribution from VGI to be diluted, but should be less than market anticipates: Following the IPO, BTS’s indirect holding in VGI will decline to 70.7% from 100%. As such, the earnings contribution from the transit and in-store ad space vendor will be diluted. However, with new information available, we have revisited our earnings forecast for VGI. Our previous projection now looks too conservative. We have, therefore, revised up our long-term earnings forecast for VGI by 12% on average.
As such, we think the loss of earnings from VGI as a result of its IPO will be less than the market anticipates. Based on our revised net profit forecast, the long-term earnings contribution from VGI will decline by 9% on average. We have, therefore, revised down our end-March 2013 target price to Bt7.20 (from Bt7.95) to reflect our downward bottom-line revision.
Scope to strengthen earnings with proceeds from share sale: We think BTS could put the proceeds from the sale of VGI shares to good use. Our scenario analysis (assuming a VGI IPO price range of Bt30-35/share) indicates that if BTS were to use the funds to repay debt, the interest cost saving would be Bt91-106m/year; so its FY13/14 net profit and EPS (fully diluted) would increase by 4.5-5.3% (see Figure 2). If, on the other hand, the firm were to use the proceeds to buy back some CBs, share dilution would be mitigated and FY13/14 EPS would rise by 3.4-4.0% (compared to the number of shares if all CBs are converted to stock) and would increase by 11.5-12.1% (compared to the scenario where all CBs and warrants are exercised).