20140310-Maybank_KERPL-Ticon_Industrial_Connection_17页_1mb

TICON Industrial Connection (TICON TB) Summary

Core Content

TICON Industrial Connection (TICON TB) is a Thailand-based real estate company specializing in industrial estate services. The current share price is THB17.50, with a target price of THB25.00, implying a 43% upside. The company's market capitalization is USD495M, and average daily trading volume (ADTV) is USD2M. The stock is currently trading at 8.5x 2014 P/E with a net dividend yield of 8.4%, based on a 72% dividend payout ratio (DPR).

Main Points

• Growth Outlook: TICON is expected to achieve a 60% YoY increase in net profits and 32% YoY growth in EPS for 2014, assuming full conversion of the TSR. This growth is attributed to increased revenue visibility and asset injection into a REIT planned for 3Q14.
• Asset Expansion: TICON aims to add approximately 350K sqm to its 1.3m sqm asset pool, increasing locations to 30 from 10 over the past two years. The company plans to expand further by adding another 360K sqm in 2014, bringing the total to 1.7m sqm.
• Strategic Locations: The expansion is driven by the positioning for the ASEAN Economic Cooperation (AEC). TICON has already expanded into Khon Kaen and Surat Thani, with more provincial and neighboring country opportunities on the horizon.
• Leverage Management: In 2013, TICON's debt-to-equity (D/E) ratio reached 2x due to expansion. A planned TSR issuance and conversion of warrants could reduce D/E to a comfortable level of 1.32x by YE14.
• Dividend Yield: TICON has historically paid out high dividends, with an average DPR of 75.3% during 2010-2012. For 2014, a DPR of 72% is assumed, leading to a potential yield of 8.4%, which is higher than the market average.
• Occupancy Rate Impact: If TICON's occupancy rate surpasses the base assumption by 100bps, net profit could increase by 7%.
• Financial Performance: TICON reported a net profit of THB1.4bn in 2013, which was 9% YoY growth but 24% below forecast. The underperformance was primarily due to slower property sales and higher operating expenses. TICON's gross margin improved to 76.4% in 2013, up from 62.7% in 2012.
• Valuation: TICON is valued at 2.1x PBV, which is based on its 10-year historical average. This valuation suggests a 42.8% upside from the current share price of THB17.50.

Key Financial Metrics

Business Strategy and Customer Mix

• Asset Management: TICON manages 1.34m sqm of factory/warehouse assets across nearly 30 locations. It is expected to grow its asset pool by 27% in 2014.
• Customer Diversification: While the automotive industry remains a significant client (26% of warehouse customers), the company is seeing a shift towards retail and logistics, with retailers expected to account for 31% of leased areas in 2014.
• Retail Impact: The increasing presence of retailers in TICON's portfolio is seen as a positive trend, as it diversifies the customer base and attracts more manufacturers.

Leverage and Funding

• TSR Issuance: TICON plans to issue 182.47mn TSR shares in April 2014, which could bring down the D/E ratio to 1.32x by YE14.
• Warrants: The company has issued warrants that are convertible to ordinary shares. A moratorium on warrant issues is recommended to avoid dilution.
• Capital Structure: TICON has a diverse funding structure, including operating cash flow, bank funding, and equity increases via warrants and TSRs.

Industry Position and Investment Outlook

• Positive Outlook: TICON is well-positioned to benefit from the AEC and the growing demand for logistics and distribution services in Thailand and neighboring countries.
• Analyst Recommendations: The company maintains a "BUY" rating, with the target price of THB25.00. The Maybank consensus indicates that 7 out of 10 analysts recommend a "BUY".
• Market Performance: TICON's share price has shown positive performance, with a 6.7% return in the last month and a 10.4% relative return to the market in the last year.

Conclusion

TICON Industrial Connection is a promising investment opportunity in the Thai real estate sector, particularly in the industrial estate services segment. With a strategic expansion into key locations, a strong customer mix, and a focus on long-term growth through asset development and REITs, the company is well-positioned to capitalize on the AEC and the growing demand for logistics services. Despite the challenges in 2013, the company's fundamentals remain strong, and the projected 2014 performance and valuation metrics support the "BUY" recommendation. Investors are advised to consider subscribing to the TSR to benefit from potential share price appreciation and improved financial flexibility.