BTS Group Holdings

BTS Group Holdings Plc 

Investment thesis: The key messages from the analyst meeting reaffirmed our view that BTS’s 3Q11/12 numbers will be weak, as its core businesses have all been affected by the flooding. Expectations of a QoQ earnings drop in 3Q11/12 may squeeze sentiment toward the stock in the short-term. However, we think BTS will regain momentum when the situation normalizes. In addition, the firm’s earnings profile is resilient to a weakening global economy. Its FY11/12 core bottom-line turnaround and impressive core profit CAGR of 67% for FY12-14, driven by substantial capacity expansion, should eventually support a share price re-rating.
Flooding-induced short-term profit decline for mass transit … 3Q11/12 core earnings are expected to soften QoQ, due to the impact of the flooding. The Oct-Dec quarter is normally peak season for the mass transit business, but it is less likely to hold true this year, as there were lots of govt holidays and fewer commuters during the big wet. Oct ridership fell 6% MoM (but rose 8% YoY). However, it has rebounded over the past few days after the water beneath Mor Chit Station drained away.
…and media … The earnings contribution from the media business is expected to decline QoQ, due to postponed advertising budget disbursements. Diminished expectations for the media operation prompted us to cut our FY11/12 media revenue growth forecast to 20% from 40% previously (note that we have already factored this change into our FY11/12 model).
…and the property business: The contribution from the property operation is also expected to fall QoQ, as presales and transference of condo units have been slow during the flooding period. In addition, the inundation may cause the opening of the firm’s new hotel at BTS Surasak to be delayed from the original target in 3Q11/12 to 4Q11/12, due to supply chain disruptions.
Profit recovery expected in following quarters, led by mass transit: We expect BTS’s earnings to recover in following quarters, led by an almost immediate bounce in the mass transit business (74% of BTS’s 1H11/12 operating EBITDA)—ridership has a proven track record of rebounding almost as soon as a crisis ends. The media operation should improve gradually over the next six months, while the property business is anticipated to post steadily better numbers in the months ahead. Presales at Abstracts Sukhumvit 66/1 increased to 63% from 61% at June 2011, while presales at Abstracts Phaholyothin Park were flattish at 53%. Abstracts Phaholyothin Park is expected to complete construction within calendar year 2012.