Ticon Industrial Connection

Ticon Industrial Connection Plc (TICON) 

Investment thesis

We now assume an asset spin-off value of only Bt4.7bn for FY14 (we previously assumed Bt5.0bn), which indicates lower FY14 core earnings of Bt1,264m (down 6% YoY). Coupled with a surprise net-flat factory take-up rate and a paucity of one-off gains compared with FY13, TICON’s dividend yield is likely to be squeezed, disappointing the market in the short-term. However, the solid FY14 warehouse net take-up rate of 250k sq.m confirms our warehousing growth conviction. We expect TICON to achieve a core earnings CAGR of 24% for the next two years. Our BUY rating stands, with a YE15 target price of Bt23.10.

REIT established in time for FY14, but less than expected

Although TICON’s REIT (TREIT) started trading on Jan 06, 2015, its asset transfers were completed in FY14. Thus, we can expect the gain on asset sales to be booked to 4Q14. The smaller-than-expected spin-off value (Bt4.7bn; 234.8k sq.m) along with share dilution during FY14 implies lower EPS of Bt1.15. Hence, a DPS of Bt0.86 is expected—a yield of 4.7%. The downsized spin-off combined with TREIT’s leverage of 20% will enable TICON to sell a bigger tranche at its next asset sale this year.

FY14 numbers will be slightly weak, but FY15 outlook is bright

The disappointing factory take-up rate was mainly due to one client not renewing its contract, as tractor demand has slumped with the dive in agricultural commodity prices. The lower asset sale price and, hence, smaller spin-out size of Bt4.7bn doesn’t bode well for the FY14 bottom-line either. However, we believe growth in regional logistics and retailing to accelerate demand for warehouse space in 2015 and 2016. We also expect TICON’s factory take-up rate to pick up again in FY15 as investor confidence recovers and TICON captures foreign SME customers. FY15 core earnings will also grow on a bigger asset spin-off value to its REIT and rental rate increases for existing clients are expected. Thus we expect FY15 core earnings to jump 36% YoY to Bt1,722m.

Overseas expansion

Through its strategic partnership with Mitsui &Co, TICON should start expanding its warehousing expertise overseas this year ahead of the advent of the ASEAN Economic Community merges at year-end, largely in order to cater to the expansions of and market entries of existing customers. However, as the timing and the scope for upside are still unclear, we have not yet factored overseas expansion into our valuation.