BTS Group Holdings

Below estimates 

BTS posted a 2Q14 (July-Sept) net profit of Bt633m, down 33% YoY but up 12% QoQ. Stripping out a Bt22m gain on sales of investments, core earnings for the quarter would be Bt611m, down 5% YoY but up 8% QoQ. The result was 7% below our estimate and the consensus, due to a lower-than-assumed fare and a smaller-than-expected earnings contribution from VGI. 

Results highlights

The YoY core earnings contraction was due to: 1) a lower contribution from VGI and 2) a weaker profit at the property business. VGI’s net profit slid 19% YoY to Bt257m (but rose 3% QoQ, driven by a recovery in in-store media). Meanwhile, the property business reported a YoY profit contraction—another 33 condo units at Abstracts Phahonyothin Park transferred in 2Q14 (201 units in 2Q13 and 42 units in 1Q14).

The key drivers of the QoQ core earnings growth were: 1) a higher mass transit business profit (both O&M revenue and a profit contribution from BTSGIF), 2) a bigger contribution from VGI, 3) QoQ bottom-line growth at the property unit (driven by better numbers for commercial property) and 4) lower interest expenses (down by 36% YoY and 16% QoQ, due to lower debt outstanding). Total ridership during the quarter rose by 2% YoY and 7% QoQ to 54.6m trips, while the average fare was stable YoY but dipped 1% QoQ to Bt26.60/trip. 

Outlook

BTS’s 3Q14 core earnings (Oct-Dec) are expected to expand both YoY and QoQ, driven by greater contributions from all key businesses. The Oct-Dec quarter is normally a period of high seasonal demand for mass transit use. Also, VGI’s contribution is likely to increase both YoY and QoQ, driven by the ad spend recovery and high season, while the property unit’s earnings are projected to expand QoQ, led by an improving commercial property operation.  

What’s changed?

We have revised down our FY14 net profit forecast by 4% to Bt2,193m and our long-term earnings projection by an average of 3%  to reflect our recent bottom-line forecast downgrade for VGI. As such, our end-March 2016 target price is now Bt11.50 (down from Bt11.60).

Recommendation

Expectations of earnings growth in 3Q14 and anticipation new state infrastructure projects will boost the share price in the months ahead, we believe. BTS currently trades at an end-March 2016 PBV of 2.5x, 0.1SD above its long-term mean of 2.2x, which we believe is justified, as there is scope for upside to BTS’s long-term earnings from management contracts for new mass transit lines.