BTS Group Holdings

BTS Group Holdings Plc (BTS)
Investment thesis
Last week, we accompanied Mr Surayut Thavikulwat, CFO, on a non-deal roadshow to Hong Kong and Singapore. The fund managers we met liked BTS for its good earnings profile, scope for growth and high dividend yield. Even though the investors believe that the firm’s competitive advantages should enable the firm to win the contracts to manage the Dark Green Lines (South & North), we sensed that they mostly wanted to see the first tender open for new extension lines before adding exposure to the stock. The most frequency asked questions focused on: 1) the details of four new potential extension lines and 2) the outlooks for existing businesses. We have summarized the key discussion points below:  
1) Tenders for new extension lines expected to open soon   
BTS said Oct 2013 is a key month to watch, as regulations under the new Public Private Partnership Act are expected to be completed, enabling the tender to open for the management contract for the Dark Green Line-South before YE13. The tenders for the Dark Green-North and Pink lines are expected to open by early 2014, followed by the Light Rail Train later that year. The winners of the bids are expected to be announced 3-6 months after tenders open. The key risk of the projects would be construction delays.
Currently, BMCL is the only obvious serious competition for the contracts. BTS believes it has clear advantages that should enable it to profitably submit lower prices than any other bidders, which makes it very likely to win the contracts/concessions for the new lines. The firm targets project IRRs for these new lines of 10% (exclusive of possible earnings upside from synergy-building with its media business).
On the financing front, even if the Bt2trn borrowing law were to be delayed, BTS could cover costs tied to winning contracts for new lines using the proceeds from forward sales of net fare box revenues to BTSGIF, the exercising of BTS-W3 warrants, operational cash flows and debt. Under the worst-case scenario where the BTS-W3 warrants aren’t in-the-money, the firm could raise more debt and/or sell 30-year O&M contracts to BTSGIF. BTS shouldn’t be exposed to interest rate risk—it can pass through interest costs to the govt, based on the current investment structure.   
2 )   Good outlooks for existing businesses 
The company’s existing businesses should continue to post strong earnings growth. Management guides that BTS will benefit indirectly (through dividend income from BTSGIF) from ongoing ridership growth of 7-10% in FY13/14 and 7-8% in FY14/15. The media unit (VGI) will continue to achieve swift bottom-line expansion in FY13/14, led by BTS-related media which should offset the effect of slowing modern trade media receipts. There is scope for upside to its property business, as BTS currently holds land worth almost Bt20bn in Bangkok, the value of which we would expect to increase in tandem with the development of mass transit lines.