BTS Group Holding

BTS Group Holding Plc (BTS)
New warrants approved by Board. BTS’s board approved the issue of five-year warrants (BTS-W3) of up to 3,971.6mn units to existing shareholders, at no cost, at a ratio of 3 existing ordinary shares for 1 warrant (Figure 1). The exercise ratio is 1:1 and the exercise price is Bt12/share. The first exercise of the warrants will be the last business day of the first quarter in Year 3 (Dec 2016). The objective of the warrant issue is to ensure its readiness to take on any future projects, particularly rail mass transit projects. This proposal will be sent to the shareholders for approval at the EGM (scheduled for Oct 11).
2018Vision: focus on mass transit. BTS released is “2018 vision”, in which it envisions continuing as Thailand’s leading mass transit developer and operator. Its targets an expansion in its existing Bangkok mass transit coverage to 115.1km in 2018 from 36.3km now (23.5km core system under BTSGIF, which it holds 33%, and 12.8km in the extension lines under O&M contracts). Its O&M revenue is expected to grow to over Bt10bn in 2018 from Bt1.5bn this year. BTS believes it is in a good position to be awarded new mass transit projects for several reasons. Its CAPEX and O&M expenses are lower as it is the only operator able to provide seamless service (especially for the Green line extensions). It also has a proven track record, with 13 years of experience as the BTS operator, and it was also able to complete the BTS core line construction within 35 months. It also possesses financial strength and flexibility with cash of Bt30bn plus proceeds from the exercise of warrants of potentially up to Bt48bn.
New project targets. It intends to bid for new mass transit projects (Figure 3) with a policy minimum IRR of 10-12%: the Green Line in Dec 2013-early 2014, the Pink Line in early 2014, and Light Rail transit line in 2H14. BTS estimates total project costs of Bt117bn (E&M and civil). Based on its comfortable target D/E at 1.5:1, equity required for these projects is Bt47bn. For overseas investments, it is conducting feasibility studies to investigate joint investment in Indonesia (US$800mn for civil and E&M) and Vietnam (waiting for TOR, O&M only), which will be finalized next year. As a part of a JV, the investment amount seems insignificant.
BUY. We continue to like BTS for its high dividend yield and potential upside from new projects. The first exercise date for BTS-W3 will not take place for three years and will thus not affect its committed high dividend yield at 7-9% p.a. in FY2014-16, based on its committed dividend payment at Bt6-8bn/year. Its massive cash on hand, potential additional proceeds from the exercise of the warrants and room to obtain funding from banks will support its planned bidding for new projects. We trim our FY2014 earnings by 15% after adjusting the extra gain from the setup of BTSGIF, deducting minority interest and tax expenses related to this transaction. Maintain BUY with 12-month SOTP PT of Bt10.3.