Ticon Industrial Connection

Ticon Industrial Connection Plc (TICON)  

 

Investment thesis 

After attending TICON’s analyst meeting, we feel that the firm’s outlook is quite somber. Despite the warehouse net take-up rate being on track for our 200k sqm estimate, we felt that factory occupancy will fail to improve this year and that the net take-up rate will miss our target of 75k sqm—inevitably undermining the firm’s net margin with higher depreciation and interest. The REIT spin-off size in 4Q15 is maintained at Bt3bn with an expected blended gross margin at 29%—lower than its long-term average of 43%. Thus, our 2015 net profit estimate is revised down 20% to Bt604m, but similar to its peers, the stock’s price downside should be limited by its PBV valuation (currently at 0.84x) and the upside from the sale of its land bank. We maintain our HOLD rating but lower our target price to Bt12.5.

Result recap – net loss for 2Q15

Although we only expected a small profit of Bt12m for 2Q15, TICON’s bottom line missed our expectation and reported a loss of Bt30m.The firm’s revenue increased 17% YoY and 29% QoQ, however its interest payment increased and depreciation remained high due to a large number of vacant ready-built factories during the quarter.

Low factory occupancy rate will hurt this year’s net profit

Decent warehousing demand and less aggressive expansion have improved the firm’s warehouse occupancy rate for eight quarters in-a-row to 67%, yet factory occupancy rate have hit a new low of 49%. We feel that factory demand has not fully recovered and revise down our net take-up rate to 40k from 75k sqm, but maintain warehouse net take-up rate at 200k sqm for this year. With lack of revenue from the unoccupied facilities and higher debt burden, we revise down our net profit estimate to Bt604m on the basis that depreciation and interest payments will remain high. 

REIT divestment maintained at Bt3bn

Management has reconfirmed the firm’s REIT spin-off size in 4Q15 at Bt3bn. Approximately 155k sqm of 82% warehouses and 18% factories will be spun off. The freehold-to-leasehold ratio is expected at 50:50, giving an estimated blended gross profit margin of 29%. The profit from the divestment will be the key driver in putting TICON’s 2015 bottom line back in the black. We anticipate the divestment to be trouble-free as this is a plain vanilla sale. 

Small silver lining from land bank sale

The sale of raw land that is no longer suitable for industrial use will be the only silver lining to this year’s net profit. Currently, the sale size has yet to be concluded but the hurdle gross profit margin is expected to be higher than the firm’s average REIT sale of 43%. For overseas projects, any expansion scope is still at their early stage and hence significant contribution would come about next year earliest.