Par split and free warrants boosts interest in THANI shares 

Ratchthani Leasing (THANI) announced a 2002 net profit of Bt49mn, in line with our forecasts, versus a net loss of Bt18mn the previous year. The sharp turnaround was due to a 68% surge in its loan portfolio and the absence of extra items related to provisioning expenses.

Asset quality improved as NPLs dropped to Bt33mn or 4.18% of total loans (versus 5.20% for Siam Panich Leasing). However, THANI's net interest margin (NIM), shrank from 11.87% in 2001 to 7.60% due to a sharp decline in lending yields.

This year, we expect THANI's pre-provisioning profit to surge to Bt79mn versus Bt30mn in 2002. Its bottom line, however, is estimated to fall 26.5% due to the absence of bad debt write-backs.

Last Friday THANI's share price jumped 4.3% after the company announced a free warrants issue and a par split from Bt5 to Bt1. As the stock is now trading close to our adjusted fair price of Bt12.39, we are downgrading our recommendation from BUY to HOLD.

• THANI reported a net profit of Bt49mn in 2002, versus our Bt50mn forecast. On a fully-diluted basis EPS was Bt0.82 compared with Bt1.26 on a weighted average basis. THANI's strong performance was due to a 68% surge in loan growth last year and an absence of extra items related to provisioning. Last year, the company voluntarily changed its provisioning policy to fall in line with Bank of Thailand regulations governing banks and finance companies. THANI has divided loans into five categories - general, special-mentioned, substandard, doubtful loss and loss – which requires different provisioning (i.e.1% for general and 100% for loss loans).

• Like other leasing companies, THANI suffered from a sharp decline in its net interest margin. Its NIM shrank from 11.87% in 2001 to 7.60% due to a plunge in lending yields from 15.76% to 11.55%. We believe an NIM above 10% is unsustainable given the decline in domestic interest rates and fiercer competition in the auto loans industry. Despite its spectacular loan growth, the squeeze in margins limited THANI's rise in net interest income to just 11.3% in 2002 to Bt66mn.

• THANI's NPLs declined from Bt37mn in 3Q02 and 67mn at end-2001 to Bt33mn at the end of last December. This means that NPLS now account for just 4.18% of its total loans.

• Last December THANI raised Bt145mn from an IPO to expand its business. In the same month Thai Farmers Bank (TFB) cut the borrowing rate on three tranches of loans totalling Bt170mn from MLR to MLR minus 0.75%, resulting in interest savings of Bt1.3mn a year. Recently TFB extended a Bt1bn loan to THANI with a fixed interest rate of just 4.5% for three years, well below the company's average borrowing rate of 7.08% last year. THANI will soon issue a Bt100mn debenture to refinance bonds carrying a 7% coupon rate. Accordingly, we expect the company's cost of funds to drop to 5.55% this year. NIM, however, is expected to narrow slightly from 7.60% to 7.15% to reflect further declines in lending yields.

• Last Thursday THANI's board of directors approved a par split from Bt5 to Bt1. It also approved a free warrant issue under which existing shareholders will get two free warrants (THANI-W) for three shares held. These can be exercised at a ratio of 1:1@ Bt1. However, THANI's board inserted a call option clause in which it has the right to call for warrants to be exercised if the share price remains above Bt3 for 15 working days. A shareholders meeting is set for April 26 and XW is expected to be near the end of May.

• There are three steps to calculate the theoretical valuation of THANI-W;

1. Calculate stock price after par split à Bt2.42 (using Friday's closing price of Bt12.10)
2. Calculate stock price after XW, given 3 THANI shares for 2 THANI-W for free but with exercise price of Bt1 à Bt1.852 (= ((3*2.42)+(2*1))/5)
3. Calculate the theoretical value of THANI-W by using the price after XW and then deducting by Bt1 exercise price à Bt0.852/unit of warrant or Bt0.568/share

Accordingly, we have upgraded our year-end target price from Bt11.83 to Bt12.39 to reflect the hidden value in THANI-W. As the shares are currently trading very close to our new target price, we have changed our recommendation on the stock from BUY to HOLD.