Ticon Industrial Connection

Ticon Industrial Connection Plc (TICON)

 

Investment thesis

For all of TICON’s assets under management (including REITs and property funds), it seems that both its factory and warehouse occupancy rate may have bottomed out. However, the recovery, it seems, will be a slow one. Even though we see growth in the firm’s 2016 core net profit YoY, we still deem its dividend yield not attractive enough to upgrade our rating—4.2% for 2015 and 4.4% for 2016 at  a 70% payout (long-term average is 7%). Nonetheless, its bottom-line downside should also be limited by the firm’s asset sale mandate, which management will govern according to its CAPEX requirements. We maintain our HOLD rating as we are unable to see any near-term catalysts for the stock, but we recommend that long-term investors start considering the stock based on the fact that its earnings seem to have reached their nadir. 

Costs and low occupancy rate to hurt bottom line

As occupancy recovered only slightly from the low in 1Q15 and remains at 63% overall, the depreciation of its unoccupied assets would still weigh down the firm’s EBIT as the take-up rate gradually improves. Furthermore, as the firm’s property under development and land bank remain substantially high (~1,500 rai) the interest burden associated with unutilized land will also add to TICON’s weight in the short to medium run. These two items were the two main factors behind its slim core profit/loss since 2Q14. 

Five-year plan and dividend intention announced

The firm announced its five-year Bt33bn CAPEX plan earlier this week. We see a decline in expansion plans in Thailand while management is clearly bullish with overseas investments, especially Indonesia—Thailand investments will decline 16% to Bt2.9bn, whereas the overseas budget will expand almost 600% to Bt5.6bn in 2020. The source of capital will mostly be from its REIT divestment, plus some proceeds from its land bank sale.  The lower CAPEX budget of Bt4.2bn next year is to be expected with the firm’s effort to limit its new supply in order to alleviate lower occupancy rates. Additionally, given the flat net profit outlook YoY for 2015 and a dividend payout of 72% last year, the firm has now hinted toward a higher payout than its policy level of 40% and more toward the 70% in order to maintain its absolute dividend per share.

Land sale upside

As per the firm’s CAPEX plan, its land bank sales will continue at least for the next five years, with an estimated total of Bt5.9bn in revenue. This high-margin land (~45% GM) that is no longer suitable for industrial use will inevitably help to bolster TICON’s bottom line and ease capital funding going forward. However, as management has not decided upon specific land plots, we have excluded these one-off gains from our model. Additional divestments to its REIT will also ensure that TICON’s cash flow is maintained and that its overall net profit remains in the black in the coming years.