Ticon Industrial Connection

Ticon Industrial Connection Plc (TICON)

Investment thesis: Although the potential delay to spinning off factories worth Bt1.5bn to TFUND has only a minimal impact on TICON’s NAV, the dilution effect of 97.6m TSRs has caused us to cut our YE12 NAV-based target price to Bt13.80 from Bt14.30. With only 8% upside to our target price, TICON no longer looks attractive as a capital gain play, but its 6.1% dividend yield remains good enough to justify holding the stock. Our rating declines from BUY to HOLD. Within Industrial Property space, we prefer AMATA and HEMRAJ.
Move-out number surged: TICON’s factory portfolio has posted QoQ rental occupancy rate contractions for two consecutive quarters as tenants have continued to move out of areas that were flooded in 4Q11. In 2Q12, 17 factories with a total area of 55,575sq.m vacated space. As such, although demand for new factories remained strong—15 factories with a total space of 44,600sq.m were rented out during the quarter, the leased factory portfolio diminished by 11% from end-March to 306,440sq.m at end-June.
However, management told us that the move-out flow ended in late 2Q12 and net demand growth has resumed. TICON expects to fill up all the vacant space in previously flooded areas within the next 12 months
Sustainable demand for warehouses: In contrast to its factory business, TICON’s warehouse division has been growing steadily. Net additions to occupied warehouse space totaled 29,011sq.m, enlarging the warehouse portfolio by 23% from end-March to 277,627sq.m at end-June. We expect this strong demand to be sustained through to FY14, bolstered by production expansion in the automotive industry.
Spin-off delay likely; earnings cut: The downsized factory portfolio might prompt TICON to delay its plan to spin off factories worth Bt1.5bn to TFUND from Dec to next year. As such, the spin-off value this year would total Bt2.8bn (the plan to sell warehouses worth Bt2.1bn in Nov should go ahead as planned). Although the total spin-off value is only slightly below our estimate of Bt3.1bn, the margin for warehouse sales is only 30-33%, much lower than the 45-50% for factory sales. Our FY12 profit estimate, thus, declines by 8% to Bt1.05bn.