BTS Group Holdings

BTS Group Holdings Plc (BTS)

Investment thesis
BTS’s announcement of warrant issuance is in line with market expectations and should boost investor interest in the stock in the short-term. We anticipate that the news will generate positive sentiment, as the proceeds from the exercising of the warrants would strengthen the firm’s financial capability to invest in future projects and there won’t be any EPS dilution in the near future.
Expectations of strong core earnings growth through FY13/14 together with a hefty core profit expansion profile—an FY13-15 CAGR of 31% against 8% for the SET—will make for further share price upside, we believe. Moreover, the announcement of committed dividend payments for FY13/14-FY15/16 totaling not less than Bt21,000m (implying dividend yields of 6.3-8.3%) should trigger a valuation re-rating. Over the long-term, there’s much more to the BTS growth story—new mass transit lines and the unlocking of value from property assets. The stock’s FY13/14 PEG ratio is an undemanding 0.3x, which represents a steep discount to the Asian mean of 0.5x. 
Issuance of BTS-W3 warrants to increase future financial strength    
Last Friday, BTS’s board resolved to hold an EGM (No.1/2013) at which it will propose the issuance and allocation of warrants to purchase newly-issued ordinary shares of BTS (BTS-W3; see details in Figure 1). The key reasons for the new warrant are: 1) to enhance the firm’s financial strength, which will create more financial flexibility for BTS to proceed with its future projects (including investments in commuter rail lines) and 2) to reserve funds for working capital.
No EPS dilution for three years, and …
Holders of BTS-W3 won’t be able to start exercising the warrants for BTS shares until three years after issuance (on the last business day of each quarter), so there won’t be any EPS dilution effect for at least three years. Furthermore, the warrants are currently out-of-the money—the exercise price of Bt12 represents a 50% premium over the current market stock price. Assuming that BTS-W3 and other existing warrants are fully exercised and BTS has makes no new investments, EPS dilution would be 25%. However, we believe this would be a very unlikely scenario.   
…no price dilution effect expected   
According to BTS, the BTS-W3 warrant issuance will not cause any price dilution, since the exercise price is Bt12, which implies a market price after the issuance of the warrant of Bt9.28 per share.