20140721-Maybank_KERPL-2Q14_weak_but_looking_to_better_2H_13页_537kb

TICON Industrial Connection (TICON TB) Summary

Core Content

• Share Price: THB19.40
• Target Price: THB24.00 (+21%)
• Market Cap (USD): 621M
• Average Daily Trade Volume (USD): 4M
• Sector: Real Estate
• Rating: BUY (Unchanged)

Main Points

• 2Q14 Earnings Weakness: Expected to decline by 11% QoQ and 23% YoY due to sluggish factory business and no major asset sale.
• 1H14 Performance: Net profit is forecasted at THB127m, which accounts for only 15% of the full year forecast.
• Downgrade of Forecast: The forecast is reduced by 18% to THB1.8bn, with the remaining THB1.57bn expected in 2H14.
• Positive Outlook for 2H14: The investment climate is improving, and the BOI Committee has approved THB191bn in applications since the coup.
• Strategic Partnership: TICON plans to launch a REIT in 2H14 with Japanese investors, which could unlock value and provide a funding vehicle.
• Factory and Warehouse Performance:
  • TICON has 21 factories (56,400 sqm) and 31 warehouses (199,450 sqm) earmarked for the REIT.
  • Average occupancy rate at 65% (68% for factories, 62% for warehouses) suggests potential for increased demand.
• Investment Climate Recovery: The BOI has approved THB51.5bn in July 2014, including a significant project by Auto Alliance (Ford and Mazda JV) that could boost factory demand.
• Funding and Leverage: TICON raised THB2.4bn via a rights issue at a 58% premium to 2013 book value, reducing its IBD/E ratio to 1.3x.
• Valuation: TICON is valued at 2.1x 5-year PBV, leading to a fair value of THB24.
• Dividend Yield: Net dividend yield is expected to increase to 7.7% by FY16E.
• Earnings and Profitability:
  • EBITDA margin is projected to reach 71.1% in 2Q14E.
  • Net profit margin is expected to be 24.9% in 2Q14E.
  • ROAE is expected to remain stable at 16.0% in FY15E.
• Market Performance:
  • TICON's share price has shown a 7.5% increase in 1 month and 5.0% in 3 months.
  • The stock has underperformed the market by 3.6% in 3 months and 4.5% in 12 months.
• Key Catalysts:
  • Recovery in investment activity, especially in the factory segment.
  • Spin-off of warehouse business via the IPO of TPARK.
  • Strategic REIT partnership with Japanese investors.
• Financial Highlights:
  • P/E Ratio: Core P/E is at 11.2 for FY14E and is expected to drop to 10.6 for FY15E.
  • P/BV Ratio: 2.1x for FY14E and 1.6x for FY15E.
  • Net Dividend Yield: 5.4% in FY14A, 6.7% in FY14E, and expected to rise to 7.7% in FY16E.
  • Free Cash Flow Yield: 3.0% in FY14E.
  • EV/EBITDA: 11.8x for FY14E, increasing to 12.9x for FY16E.

Key Information

• Major Shareholders:
  • Rojana Industrial Park Public: 25.0%
  • KUAN YUPADEE: 3.0%
  • City Villa Co. Ltd.: 3.0%
• Equity Raised: THB2.4bn via rights issue in June, reducing leverage.
• REITs Plan:
  • TICON will hold 20–25% of the REIT.
  • The REIT will allow for up to 60% leverage of NAV.
  • The REIT could provide funds for expansion and improve financial flexibility.
• Investment Opportunities:
  • TICON is exploring potential investments in Rangoon, Myanmar, and Ho Chi Minh City, Vietnam.
• Political Risk: There is a medium-term risk of adverse political developments, but the base case is that the country will return to civilian rule by 2015.
• Share Price Impact: The earnings downgrade is expected to be neutral as it has already been priced in.

Conclusion

TICON is currently in a weak position due to the political climate and reduced factory activity in 2Q14, but the outlook is improving for 2H14. The company is well-positioned to benefit from the recovery in investment, especially with its REIT partnership and warehouse expansion. Despite the earnings downgrade, the target price remains unchanged due to the high fair value based on PBV and the potential for improved performance in the second half of 2014 and 2015. The company is recommended to be a BUY, with a fair value of THB24.