Ongoing O&M And Ridership Headwinds Will Pressure Earnings Yet Support Modest Recovery Ahead

Catalysts

About BTS Group Holdings

BTS Group Holdings is a diversified Thai infrastructure and services group centered on mass transit, advertising, digital services and property related investments.

What are the underlying business or industry changes driving this perspective?

• Although the full settlement of O&M receivables and an MOU for on time payments underpin more predictable cash inflow from the core rail network, any renewed delays or disputes around government related contracts could again lock up working capital and limit the benefit to net profit and operating cash flow.
• While urban rail ridership on the Pink and Yellow Lines is growing and farebox revenue is improving, a softer macro environment and fare sensitivity on the Green Line extensions could cap volume and pricing power, restraining top line growth and keeping net margins relatively thin.
• Despite the rapid scale up of MATCH via the consolidation of RABBIT and ROCTEC, continued hotel and technology project execution risk, along with the need to recycle capital through divestments, may pressure earnings quality and lead to volatile EBITDA and bottom line contributions.
• Although the partnership driven media ecosystem with PlanB and the expansion of higher margin digital services such as Rabbit Card and Rabbit Cash provide multiple growth avenues, weaker advertising and retail spending and potential NPL formation in consumer lending could temper revenue growth and weigh on blended margins.
• While disciplined deleveraging supported by O&M cash inflows and asset sales is improving the balance sheet, persistently high finance costs and reduced capex budgets may limit the company’s ability to fully exploit future transit and smart city opportunities, constraining longer term earnings expansion and return on equity.

Assumptions

This narrative explores a more pessimistic perspective on BTS Group Holdings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming BTS Group Holdings's revenue will decrease by 6.4% annually over the next 3 years.
• The bearish analysts are not forecasting that BTS Group Holdings will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate BTS Group Holdings's profit margin will increase from 12.0% to the average TH Transportation industry of 7.5% in 3 years.
• If BTS Group Holdings's profit margin were to converge on the industry average, you could expect earnings to reach THB 1.4 billion (and earnings per share of THB 0.09) by about December 2028, down from THB 2.7 billion today.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 53.1x on those 2028 earnings, up from 14.9x today. This future PE is greater than the current PE for the TH Transportation industry at 9.8x.
• The bearish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.67%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Reliance on government related O&M and subsidy inflows for the Pink and Yellow Lines exposes BTS Group to political and policy risk over the next decade. Any future disputes, delays or structural changes to concession economics could reduce the predictability of cash inflows and pressure operating cash flow and earnings growth.
• Persistent macroeconomic softness and ongoing fare sensitivity on the core Green Line network, as evidenced by declining year on year ridership and the need for targeted packages such as XTreme saving, may structurally cap passenger growth and pricing power. This could limit long term farebox revenue and constrain net margins.
• Elevated finance costs and rising leverage, with finance expenses already absorbing a large portion of recurring EBITDA, could remain a drag if interest rates stay higher for longer or refinancing becomes more expensive. This may restrict net profit expansion and weaken returns on equity despite operational improvements.
• The increasing contribution from MATCH, RABBIT and ROCTEC, which are partly driven by asset heavy hotels and technology projects, raises execution and cyclical risk in real estate and ICT over the long run. Weaker tourism cycles or slower project awards could make group revenue and EBITDA more volatile and dilute earnings quality.
• Structural headwinds in the MIX segment, including declining advertising and digital services revenues and reduced CapEx guidance due to softer macro and retail spending, suggest that the long term growth of higher margin media and fintech ecosystems may be slower than expected. This could weigh on consolidated revenue growth and blended net margins.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for BTS Group Holdings is THB3.5, which represents up to two standard deviations below the consensus price target of THB4.79. This valuation is based on what can be assumed as the expectations of BTS Group Holdings's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of THB6.0, and the most bearish reporting a price target of just THB3.5.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be THB18.6 billion, earnings will come to THB1.4 billion, and it would be trading on a PE ratio of 53.1x, assuming you use a discount rate of 9.7%.
  
• Given the current share price of THB2.52, the analyst price target of THB3.5 is 28.0% higher. Despite analysts expecting the underlying business to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.