Ticon converting assets into Capital. Act 2.
Ticon made some important announcements over the past couple of business days. I will let each member read on their own read the details of the official SET announcement on this. Here is what it all means to me after I had a good conversation with management, late last Friday.
Ticon has a problem: its too successful as it can’t keep up with current and expected demand. The factory rental market remains buoyant and is expected to stay upbeat for some years to come. The market for factory rentals is far from saturated here as I believe less then a few percent of all factories in Thailand are rented, hence the market is far from saturated.
Outsourcing around the world remains buoyant with developed economies more and more deciding (being forced to) joining this bandwagon. In the long run the outsourcing trend/boom is if anything still understated –likely much further room to grow. Factory rentals are increasingly the choice of preference by the vast global & regional producers –and these don’t want to tie up large capital in factories and land. The flexibility, tax and other advantages are too strong to resist long term factory rentals/leases. In increasing times of “just in time delivery” and “lean inventory management” and into turning assets into Capital etc.. it makes ever more and more sense for global producers of all kinds to rent, not own factories.
Further, it gives companies much treasured flexibility to change location or factory, if conditions change. We all know conditions are changing faster then ever and Ticon (as a factory lease provider) is the clear dominant leader in this field in Thailand. Yes, another smaller cap, yet leading company in a fast growing & lasting trend.
As has been pointed out times here in the past, uncertainty only helps Ticon, as marginal current factory buyers might so be inclined to first lease -and maybe buy later. If/when their clients do decided to buy later it is often from Ticon as the company is frequently asked to lease -with an option to buy- written into the lease contract.
Even while most brokers have been critical and slow in understanding this, Ticon fully plans to make these factory sales a yearly event and so thereby generating some 400 to 600 mill. Baht in re-occurring capital gains from yearly re-occurring events. At some point the level of interest rates in the Thai (and or global economy) might be so high that for a while the TFUND sales might have to be suspended. By that time I think the yearly management-rental fees to Ticon might be so high that a brake is of factory sales will be then be rightly viewed as the one time event. Just the reverse of now, where the consensus thinking is still behind the curve.
Clearly, Ticon could growing even faster if it had even more capital to expand. The company already issued a (I think it was 1.5 Bill. Baht) Bond some months ago but here has to be careful not to exceed its own agreed mandate of maximum debt ratios. In time management is very confident shareholders will see that expansion was indeed warranted and if Ticon does not act now, these same will ask: why did you not increase capital to support this evident strong growth?
For these reason Ticon just announced plans to issue up to 107 mill. new common shares, via a private placement. No time table nor minimum amounts to subscribe has been set. By making this announcement, late last week, it effectively invites new investors to the Ticon success story by offering a new block of shares. Unlike a rights offering, the private placement invites out-side new investor, and unlike a rights offering the price of the new shares is likely to be at a premium, not a discount. The board of Ticon has pretty much agreed that the “pricing of these new shares should not be below 20 Baht per share”.
Hence, while the official announcement to the SET states “a discount or a premium of up to 10%”, and while most brokers would tell you that such an offering must be at a discount, the company is confident it will be at a premium to the current market price of around 17-18 Baht per share. (While I don’t have the details right at hand here, earlier this year Ticon placed a large block of existing shares with a Hong Kong institutional investor, also at a premium to the then prevailing market price). Ticon has a proven recent history of placing shares at a premium to market prices -and I remain very confident this can remain so. As I understand the board of Ticon has in effect stated it is asking for at last a 10% premium to the current mkt. price.
Ticon is and remains in a strong growth phase. The first 6 months of this year exceeded its own optimistic projections earlier. The company just posted a second-quarter net profit of 654.17 million baht, an increase of 38.1% from the same period of last year. First-half profit rose 25.6% year-on-year to 707.50 million baht.
"Demand for new and existing rental factories remains strong. In the first six months of this year, we increased the amount of leased space by 28%," Says Mr Virapan Pulges, Ticon’s Managing Director.
It just does not make sense for this leading growth company, relatively capital intensive, to also be a “high current cash dividend horse”. As seasoned American investors would be first to point out: it just does not make sense to be on a high growth path and then also pay out most profits in bi-annual cash dividends. High growth demands capital. Why raise new equity to help solid expansion plans and then in the same year pay out a huge amount in cash dividends? For this reason Ticon has rather rationally so, just decided to defer the expected interim 0.6 Baht dividend to a large final dividend early next year.
I fully expect (and was guided so) that the 1.20 Baht cash dividend will/would be maintained. So from now on out Ticon plans to pay a large one time annual dividend, rather then split it up in two smaller amounts, twice a year
As Ticon places this just announced proposed tranche of 107 million new common shares, the number of shares outstanding will also increase. There so will be a dilution effect by some 18 % as the total net annual profit will have to be divided by 107 mill. more shares outstanding. Still, due to strong expected growth with new promising opportunities in building more factories, I am rather extremely confident the 1.20 Baht dividend per share can be maintained -and that earnings per share (EPS) can keep growing this year as well as next and beyond. Investors whom want high cash dividends should invest/switch into the TFUND, as at the current mkt. price of 9.7-9.8 brings a yield of 8.20 %.
This current yield should increase gradually over the years as the factory rental prices (lease renewals) move up. Investors whom seek high growth with dividends as a secondary objective, should buy/invest/hold onto the common shares of Ticon. At the current mkt. price of 17.10 -and firmly believing the 1.20 annual dividend is/remains in place- the current yield on Ticon common shares is 7 %, or still nearly double the average yield of the Thai stock market average dividend yield.
Investors from developed countries think one in life has to chose either to own a growth stock or an income stock, in Ticons’ case you still can have both. My own view on “strong buy” is maintained on Ticon.
Best Regards,
Paul A. Renaud
www.thaistocks.com
PS.
Ticon stock has more then tripled in value since I very favorably wrote about this firm in late October 2004. Ticon’s shares so outperforming the SET Thai stock market index by a huge margin. I think this will continue into the medium term future.
This company is an outstanding shinning example of what happens and how new wealth gets created when you convert dull assets into capital to realize high growth and so ones full potential. This concept/conversion was best outlined in well known book called “The Mystery of Capital” by Henando De Soto.
