Ticon Industrial Connection

Ticon Industrial Connection Plc (TICON)

 

Core rental for 4Q14 in line with model, better FY15 outlook

TICON’s 4Q14 core rental gross profit of Bt186m was in line with our expectation. Its factory take-up rate is recovering and its warehouse take-up rate remains strong. The 33% YoY net profit dive to Bt596m is not indicative of the core operational performance, we believe—it was due to complications tied to asset spin-offs to a REIT. TICON announced an FY14 DPS of Bt0.50, as we had expected (XD on April 28; payment on May 19).

Results highlights

The gross profit from 4Q14 asset sales to the REIT was Bt995m, which was 36% below our estimate. Asset sale GM posted a new low of 30%, as the GM for divested warehousing was just 27% (but factory GM was sustained at 45%). Furthermore, TICON set a Bt118m provision for its REIT income guarantee, which also squeezed the bottom-line. 

Outlook

The 1Q15 net profit will drop QoQ and YoY, due to the absence of asset spin-offs in 1Q15. Given a diminished expectation for gains on sales of warehousing space to REITs, we have cut our earnings forecast for FY15. Having said that, we still expect TICON’s core business to grow well this year, as we anticipate that warehousing rental area will continue to expand and that ready-built factory sales and rentals will recover.

What’s changed?

We have cut our FY15 forecasts by 14% for revenue to Bt5,693m and by 36% for net profit to Bt1,080m to factor in a slimmer expectation for GM for warehouse sales and because we now expect income guarantee provisions to be set for each sale of warehousing space. There would be upside to our bottom-line projection if the sale GM of warehousing space sold to REITs were to fatten or the provisions were reversed. Note that we assume net additional rental for FY15 of 60k sq.m for factories and 200k sq.m for warehouses, which is below management guidance.

Recommendation

We believe that TICON’s current portfolio mix of ready-built and built-to-suit contracted assets is well balanced at 70:30. Ready-built factories and ready-built warehouses carry fatter margins than built-to-suit warehouses, but the built-to-suit category has the advantage of longer tenure lengths. Despite our FY15 projection cuts, we still expect TICON’s core business to expand. Thus, we believe it can trade at 1SD above its long-term PER of 14.4x. Because of our lower profit forecast, we have cut our YE15 target price by 12% to Bt20.30, but our BUY rating stands.