BTS Group Holdings

BTS Group Holdings Plc (BTS)
Investment thesis
On Monday, we arranged a BTS CEO Forum for institutional investors. Mr Keeree Kanjanapas, executive chairman, and top executives participated in our event. Their comments left us with the impression that BTS is committed to sustaining long-term growth through all its key businesses (mass transit, media, and property), but the priority is new mass transit extension lines.  Moreover, management reaffirmed that dividends totaling not less than Bt21bn will be paid for FY13/14 to FY15/16. Valuation-wise, the stock’s FY13/14 PEG ratio is an undemanding 0.3x, which represents a steep discount to the Asian mean of 0.5x.  
Major scope for growth from investments in new extension lines
BTS’s goal is to be a leading Thai mass transit developer and operator in 2018 with: 1) triple its existing mass transit coverage (from 36.3km to 115.1km) and 2) mass transit operation & maintenance (O&M) revenue growth from Bt1.5bn in FY13/14 to over Bt10bn. The firm plans to bid to operate and/or develop four new extension lines (total length of 78.8km) which will connect to its existing lines: 1) Dark Green Line (South), 2) Dark Green Line (North), 3) Pink Line, and 4) Light Rail Train (Figure 1).
The tender is expected to open for the Dark Green Line (South) before YE13 (after the Public Private Partnership Act is passed, probably in Oct); the other three lines should open to tender in 2014. BTS believes that because it is an ensconced operator with existing maintenance facilities and other physical and human infrastructure in place (see Figure 2), it can profitably submit lower prices than any other bidder, which makes it very likely to win the contracts/concessions for the lines. If it were to win the four extension lines, we preliminarily estimate that the firm’s core earnings would expand from Bt2.5bn in FY13/14 to Bt7.8bn in FY17/18.
Strong financial capacity for future investment
Based on management guidance, total CAPEX (civil work plus E&M) for the four new lines would be Bt116.8bn. Assuming a mean project debt/equity ratio of 1.5:1x, the total equity required would be Bt46.7bn and the expected cash shortfall would be Bt41.7bn (net of existing cash and assumed operational cash flows and dividend payments). As such, the firm has issued warrants (BTS-W3) to strengthen its financial position and ready itself to take on new opportunities as they arise.
Further growth opportunities have been unveiled
Apart from the four aforementioned projects, there are two more extension lines (Light Green and Grey) on which BTS may potentially place bids. Moreover, the firm will cautiously expand its property business. BTS currently holds almost Bt20bn worth of land in Bangkok, the value of which we would expect to increase in tandem with the development of mass transit lines. The firm might even decide to list its property assets on the SET, which would enable it to mark-to-market its shareholding.