Bangkok Dusit Medical Services

Bangkok Dusit Medical Services Plc (BGH)

-Issuing convertible bonds (CB) not exceeding Bt10bn to fund expansion
- Raising capital 5% as reserve for conversion and general mandate
- Our calculations show little impact on earnings and little dilution
News: BGH announced that it will issue convertible bonds (CB), raise capital and lift
the foreign limit to 25% (from 20%).

Details:
- CB. The CB will be no more than Bt10bn or equivalent in other currencies and
allocated to foreign investors, with a term of not more than five years. The details
of coupon rate, final conversion price and conversion ratio will be determined after
the transaction is approved by shareholders at a meeting on August 5, 2014. The
conversion price will not be below Bt16.51/share (90% of average price May 28–
June 17). BGH expects to complete the offering this year.
- Capital increase. The company will also increase capital by issuing 774mn new
shares (par Bt0.1/share). Up to 542mn of these will be reserved for the exercise of
the CB, or 3.5% of current paid-up shares. The remaining 232mn shares (1.5% of
current paid-up shares) will be set aside for a general mandate. In the meantime,
the previous general mandate approved by shareholders in April 2014 is cancelled.
Note: A general mandate is a capital increase process where shareholders approve
the number of shares and allotment types at a shareholders meeting far in
advance. This gives the board of directors the authority to decide on the details
when it is ready to undertake the capital increase.
- Increase foreign limit to 25% from 20% to give room for the increase in shares
brought by the conversion of the convertible bond in the future.
insignificant increase in interest expense. We believe BGH is laying the
groundwork for future investment, ready to get in on any opportunity that will
enhance its long-term growth path. BGH says that if it does not see an attractive
investment opportunity, it will use the funds from the CB to repay debt. Our
assessment suggests a 3-5% impact on net profit in 2015 from incremental interest
expenses, assuming 3-5% coupon rate, no investment and it keeps the entire Bt10bn
CB on its balance sheet. The impact falls to 1-2% if BGH uses the funds to repay debt.
Even with the CB, BGH’s financial health is strong at 0.7x interest-bearing debt to
equity (up from 0.5x).
Only 5% dilution effect. If all CBs are converted and the shares under the general
mandate are used, there will be just 5% dilution, which would mean a negligible
change to our TP. It is also unlikely to be immediate if the conversion price is a
premium to market price. We maintain our positive view on BGH with earnings
returning to an uptrend, driven by improving EBITDA margin. Its long-term earnings
growth path is promising, undergirded by its large hospital network that encompasses
all types of medical services and patient groups.