BTS Group Holdings

Investment thesis

If BTS sells property assets to NPARK, as it plans, it will unlock value and open scope for upside to long-term earnings. In addition, the FY14 net profit would get a bump from the capital gain. Regardless, expected QoQ earnings growth in 2Q14 and anticipation new state infrastructure projects will boost the share price in the months ahead, we believe. The stock is cheap—an end-March 2015 PBV of 2.1x, 0.1SD below its long-term mean of 2.2x. Moreover, the announcement of committed dividend payments for FY14-15 (implying dividend yields ranging 7.1-8.1%) will support the stock price.   

Disposal of some property assets in exchange for NPARK shares 

Yesterday, BTS’s board resolved in principle to consider divesting two subsidiaries that are in the real estate business—BTS Assets Co Ltd (BSTA) and Kamkoong Property Co Ltd (KKP)—to Natural Park Plc (NPARK) in exchange for: 

1) newly-issued ordinary shares and warrants of NPARK under a private placement totaling 213bn shares (representing not more than 37.06% of the total issued shares of NPARK) at an offering price of Bt0.047/share, 2) warrants to purchase ordinary NPARK shares at a ratio of two ordinary shares for one warrant unit at no cost (one warrant unit may purchase one newly-issued ordinary share at an exercise price of Bt0.047/share) and/or 3) an amount of cash if appropriate (depending on further negotiation between the related parties). 

BTSA owns Eastin Grand Hotel Sathorn and land plots on Phaholyothin Road near BTS Mor Chit station. KKP owns land plots located on Phayathai Road next to BTS Phayathai station. Note that BTS will conduct a due diligence inquiry into NPARK and its subsidiaries. A final investment decision is expected before YE14.     

Unlocking value from property assets    

This move is in line with BTS’s strategic plan to seek new opportunities for its property business, including establishing joint-ventures and/or divesting assets. Assuming combined market value for BTSA’s and KKP’s assets at Bt8-10bn and a book value of Bt4-5bn, we expect BTS to realize a net after-tax capital gain of Bt1.5-3.0bn.

Even though, the disposal of Eastin Grand Hotel Sathorn Bangkok would result in a 1% cut to our BTS earnings forecast over the next few years (before recognition of equity income from NPARK‘s new projects), we think there would be scope for upside from new investments in property projects through its holding in NPARK. Moreover, BTS’s holding in NPARK would increase its SOTP target price by another Bt0.60/share. Assuming that NPARK’s RO (according to the resolutions of the EGM held on September 16, 2014) is fully subscribed, NPARK will receive proceeds of Bt6.3bn. Note that NPARK’s net debt/equity ratio at end-June was only 0.2x.