BTS Group Holdings

BTS Group Holdings Plc (BTS)
Railway extension shows progress. To be auctioned soon
On 11 October, Mr.Chadchart Sittipunt, the Minister of Transport, revealed about the
meeting with MRTA on hastening the auction for railway extension. Although there is
no conclusion whether the original operator or the new one from the auction should be
operating, there would be two sessions of auction, each for two lines of railway
extension, as follows:
1) Blue line extension (Bang Sue - Thapra and Hualangphong - Bang Kae) and Green
line extension (Mochit - Saphan Mai - Kukot) - MRTA would propose this to the Cabinet
for approval to bid for the contractor and the railway operator for Green line, as well as
the railway and maintenance operator for Blue line within late-2013.
2) MRTA has previously adjusted Pink line extension (Kae Rai - Minburi) and Orange
line extension (Cultural Center - Minburi), so the projects would be proposed to the
Cabinet, and the bid for the contractor and the railway and maintenance operator
would be later than other two lines (within 2014). BTS aims to participate for the
auction of Green line and Pink line extensions.
- Railway extension auction within 2014. BTS to win four lines
This progress is likely to benefit BTS, which aims to expand its investment with B14bn
net cash from establishing BTSGIF. BTS has high chance to win the auction for Green
line extension (Mochit - Saphan Mai - Kukot), as it is linked to current Green line, as
well as Pink line extension (Kae Rai - Minburi), which will be linked to future Green line
extension (Mochit - Saphan Mai). Moreover, BTS is likely to invest in the auctions of
other two lines in 2014: 1) south Green line (Bearing - Samutprakarn) and 2) Bangna -
Suvarnabhumi.
As the government has hastened the auction, we believe that all lines would be
available for auction within 2014. As all lines are linked with BTS's original lines, BTS is
advantageous for long-term operation and maintenance. Whereas BMCL, BTS's only
rival for the auction, is current not financially strong, BTS is financially stronger
(thanks to the net cash). Moreover, BTS is likely to gain additional B47bn capital
increase from conversion of BTS-W3 (3,971m units, 1 unit of warrants for 1 ordinary
share at the exercise price of B12/share, available from 2016 on), granting BTS
additional cash B61bn total. As BTS's end-2013/2014 (ended March 2014) D/E is below
1x, BTS can borrow to raise fund. Under 1.5x D/E assumption, BTS would afford to win
the auction for all four lines at the value of B110bn without difficulty.
- New fair value excluding extension value has 32% upside. "BUY"
Though the construction takes three years and the railways would be available in 2017,
there has been some progress as the government has hastened the auction. We derive
BTS's fair value in case that BTS wins the auction for all four lines and gains 30-year
operation and maintenance income. Under our conservative method, we forecast that
BTS would earn B120m/km/year operation and maintenance income for the extension
(the average of BTS's income of B140/km/year from the operation of current line and
BMCL's income of B100/year from Purple line), BTS's train operation fee rate would
rise by 3.5%, along with inflation rate, and projected EBITDA margin would be 30%
(the average of BTS’s current EDITDA margin at 50% from operation and maintenance
income and BMCL’s Purple line EDITDA margin at 10%). As BTS’s current fair value is
B9.00l its new fair value would be B12.00, so BTS has 32% upside and 5%/year
expected dividend yield. We upgrade our recommendation from "HOLD" to "BUY".