Bangkok Metro

Bangkok Metro Plc (BMCL)

MRTA concludes Purple Line O&M contract payment to BMCL at
B59bn for 26 months

After MRTA has selected BMCL to operate the MRT Purple Line project (Bang
Yai – Bang Sue), now BMCL’s board has approved for the company to enter
into the agreement with the total term of 30 years. Work will be divided into
2 phases including 1) the phase of design, supply, installation, testing of
mechanical and engineering (M&E) systems, and other related systems for a
period not exceeding 1,200 days from the date of execution of the concession
agreement. Total financial cost of the first phase is approximately B21bn
whereby the MRTA shall make monthly payments to BMCL for the work at the
equal rate each month for a period of 10 years after the commencement of
the operation; and 2) the phase of operation service and maintenance of the
M&E system for 26 years with total value of B59bn (excluding conditions
regarding the inflation rate and electricity cost). Accordingly, total contract
value is B80bn. For the next process, MRTA will propose the issue to the
cabinet for consideration and approval according to Section 32 of Thailand’s
1992 public-private joint venture act.

BMCL benefits directly and indirectly from Purple Line extension contract
Although the financial cost of the first phase is as large as B21bn, all the
burden as well as profit from the work will fall to CK which has made a
subcontract with BMCL. After the work is complete, CK will transfer the asset
to BMCL, which will transfer the asset forward to MRTA. For the payment,
BMCL will bring money it receives from MRTA to repay to CK, so there will not
be an effect on BMCL forecast. For the second phase, BMCL will receive
operations and maintenance (O&M) consideration payment for 26 years at
B59bn in total, starting from the date of the operation commencement. This
is new value added that has still not been included in our forecast.
Consequently, we include the new value in our forecast, using conservative
method, projecting the return regardless of the rise from the inflation rate
and electricity cost as well as net margin for the operations and maintenance
at 15% (close to that of BTS). Accordingly, since 2016 net profit of BMCL will
increase from the current forecast average by B300m a year (or fair value of
B0.18/share). Moreover, we project that the opening of the Purple Line will
benefit BMCL in terms of increasing ridership in the main route (Hua
Lampong – Bang Sue), which has already been included in the forecast, so
we believe BMCL will flip to show solid profit again since 2016 onward.
However, as no benefit will be seen in the next 2-3 years, we maintain our
forecast for a net loss in 2012 and 2013 at B1,034m and B798m
respectively.

Share price already reflects new fair value including purple line at B0.78
As the service will not reach a breakeven point until there is a support from
the Purple Line extension in 2016, shareholders’ equity in BMCL might remain
in a negative territory in the next 5 quarters and the company will still be
considered the business that needs restoration. Consequently, in order to
have sufficient money and equity before the opening of the Purple Line, BMCL
is still open to a risk of capital increase in the next 6 months. Furthermore,
new fair value is B0.78 (under an assumption for capital increase), which
implies limited upside from the current share price that has rallied by 9.2%
since the good news announcement. Therefore, we upgrade our
recommendation from SELL to HOLD.