Ticon, another visit in person.
Below is an original member only article as first published here on July 21 '05.
Double the yield and a 50% discount to the p/e averages, as compared to its sector.
The average p/e of the Thai property sector is 9.6 and the average dividend yield is shown at 5.55% per year. According to Bualuang Securities, as of July 12 05. Ticon remains a solid choice of mine and so commands half the full allocation of my currently running model portfolio.
The lastest news on China re-valuating their currency upwards is just the beginning of more upwards valuations to come. I view this as new net positive for Ticon and not un-expected.
I had a yet another good visit with Ticon and as well noted early last week in our member lounge, remain as upbeat as ever. I firmly re-rated Ticon a "strong buy view" when it price corrected to below 9 Baht, during the middle of July. As noted, the next positive news will be a handsome dividend announcement along with a huge earnings report for the second quarter. I expect this report to come out around the second week of August.
In the just passed second quarter, around 410 million Baht of net after tax profit will be realized from the establishment of the TFUND, Ticon"s first property fund. (Ticon still hold 33% of this Tfund, so the 410 mill. profit represents only for the remaining 67%.) As indicated, this is not a one time extraordinary gain as Ticon has stated all along that its corporate plan is to sell every year some 40 to 50 additional factories to its property fund -and recently stated probably to the same fund. The goal is to increase the market cap. of the existing Tfund to 100 mill US$, so to reach the "radar screens" of the global high yield institutional investment community. This would increase the marketability and liquidity of this fund. I expect this to happen by the 2 to 3 quarter of next year.
Most Thai broker reports I have seen still do not report correctly what the company has stated and expected to do and realize over the next few years. Most all assume the property fund sale is a one time event and just flat refuse to believe and report that Ticon will do any more. Why? I for one have long stopped wondering why local research reports can be so stubborn or biased. Finansa is one noble exception, there the analyst projects Ticon to earn 1.32 Baht this year and 1.40 Baht next year, as compared to 0.56 Baht reported for calendar year 2004. While I think even these solid numbers may prove to be conservative, they indicate a p/e of 6.7 for this year and dropping to 6.3 next year, or a 50% discount to the updated property sector p/e averages!
The updated average annual dividend yield of the property sector is shown at 5.5% for the next 12 months. This is half the expected annual dividend yield I expect for Ticon over the next year. Say 1.05 Baht per share divided by 9.5 the current market price, yields 11%. Since earnings are expected to further grow in year 2006 and 2007, the yield should advance even from this high level.*
From this point there are three main drivers for earnings growth beyond this year:
1) Fee, besides dividend income, from the management of the first and now to be expanded TFund. The fee income is not to be underestimated.
2) Continuation to build and lease new factories, beyond what is sold off to their property Fund. This year Ticon expects to build and lease around 52-55 new additional factories. This remains their core business and no slowdown is seen.
3) Development of the new "logistics park" with the 400 Rai of land Ticon purchased just a few weeks ago. The plan is to develop mega warehouses, all around the new Airport. By mid August the shareholder structure of this new venture should be announced. This attractive land lot has already appreciated in market value since the purchase. Income from this exciting project is expected to come in the second half of year 2006. It is hoped but not at this point a certainty that Ticon will get BOI tax privileges on this project.
4) New non-standard factories. The start of developing larger the standard factories with bigger lot sizes and more custom made for bigger companies is now considered. These will be leased to more established big company tenants and will so command larger and longer lease periods.
Below are some of the risks I myself here try to identify. Risks which are beyond a global economic depression or a catastrophic event. The biggest risk is a delay in earnings recognition (micro) and/or an outright SET bear market where the benchmark index tumbles below say the 620 level. (macro). However the high expected dividend yield expected should prove to be an "invisible hand" in holding-up this stock price. This will be become clearer to investors once the interim dividend is announced by mid August. My own expectation is that this interim dividend is around 0.50 Baht and 1.05 for the next full 12 months. Ticon common shares pay dividends twice a year.
While I do not worry much about the below risks (due to these being unlikely) they are still good to try to identify. I probably am missing one or two? Feel free to contribute to this list by making contributing a comment attached to this article:
a) The next lot of sold factory properties to the TFund may not be ready to go within a year, and so the next capital gain is delayed. (But not likely as REIT"s are now very popular around Asia and local or US interest rates not likely to soar).
b) The logistics park project turns bigger then anticipated or, the venture-partners are less eager to join, so requiring more investment then Ticon anticipated, hence a capital increase may be necessary. Especially so if point "a" above, materializes.
c) Local and global interest rates increase dramatically over the next year, making it more difficult to grow their real estate investment trusts (REIT) and so the TFUND.
d) Key management leave the firm or have an accident or health problems, so leaving a temporary hole in the multiple factory lease talent & contacts, which Ticon now commands. This is almost always a risk, in any business, and I do not see any reason why this is larger risk with Ticon. (My view is that this is a lesser concern here to the extend that company is doing so very well, profit and stock market wise. Key employees with stock ownership have strong reasons to stay.
When it comes to current dividend income, earnings growth, business model and the fact that some global uncertainty might even benefit Ticon (lease rather then own), I remain a strong Ticon bull, despite its already near 70% price appreciation since here first pounding the table on, last October 27 "04.
I compare Ticon"s business in many ways as similar to the booming temporary employment business which soared in the 1970"s and 1980"s. Companies the world over are more and more interested in tying-up dire capital in what they do best, not in bricks and mortar. They want to remain flexible and not married to any geographical location.
Ticon is the right corporate choice for Thailand as it represented in 12 different industrical sectors/zones all around Bangkok and so, is the clear market leader in what it does.
Best Regards,
Paul A. Renaud.
* While I do not like to make such long term predictions: at the current market price, I could see long term investors getting all their principal money back within 5-8 years, just based on Ticon"s total annual dividend payment over this same period. The stock price in the meantime could well surge beyond 30.
