Ticon Industrial Connection

Ticon Industrial Connection Plc (TICON) 

 

Investment thesis

We downgrade our call on TICON from BUY to SELL due to diminished expectations for its earnings outlook. Our recent talks with TICON managers lowered our optimism on the size of this year’s REIT sales and margins. Although we agree with their decision, in the interim, this should prompt a consensus earnings cut as REIT sales now make up 70% of TICON’s earnings power. The firm’s dividend yield is also likely to miss market expectation, so we believe that its share price would underperform in the short-to-medium term and reset to a lower base. With that, we have lowered our FY15 NPAT forecast by 38% and target price to Bt15.10, from Bt20.30. But, in the long term, there is scope for upside from a possibly bigger asset spin-off, but we believe this would be too early to price in.

Nevertheless, we remain positive on TICON’s core business—foreseeing growth in its warehouse rentals and a recovery in its factory rentals in the not-too-distant future.

Smaller REIT sales expected…

TICON’s first REIT sale in 2014 was disappointing because complications concerning its structure yielded disheartening sales GM of 25% (historical average spin-offs yielded 40% sales GM). As TICON’s CAPEX budget will be at a low of Bt5,000m, management have indicated that the FY15 REIT sale size may be smaller than we initially expected, as unnecessary REIT sales at a low GM will hurt shareholder value. This has led us to revise our FY15 asset spin-off estimate down by 15%, from Bt4,596m to Bt3,923m. 

…prompting a FY15 earnings downgrade

Now that 70% of TICON’s earnings power depends on asset sales, a smaller REIT divestment size would significantly affect TICON’s bottom line. Also, sellers will have to set up rental guarantee provisions for their REIT sales, lowering our margin outlook. As a result, we have lowered our FY15 revenue estimate by 21% to Bt5,239m and NPAT down a further 38% to Bt1,043m, respectively. Until the REIT divestment margin improves, the minimal spin-off size will definitely dampen TICON’s forward earning expectation. Furthermore, with the reduced earnings, we believe TICON’s usual yield of 6-7% is unlikely to be sustained.

Scope for upside too early to price in

Despite a heavy cut in our earnings forecast, we remain optimistic on TICON’s core business – warehouse rental growth and the recovery of its factory rental business is within sight. However, with the current revenue structure, the growth in TICON’s rental income will fail to add meaningfully to its bottom line and valuation. Instead, this will provide a good base for bigger spin-offs in the future.