Ticon, the transferring of assets into capital.
Ticon is transferring assets into capital -and most have not yet got the message what that means.
Ticon was actively trading at 6 Baht per share when the SET closed at 626, on October 27 '04. This was the date when this stock was first very positively reviewed here in detail. All members received a direct e-mail to this enthusiastic view on that same day..
Ticon's sale of properties is a classic transferring of assets into capital and thereby the creation of new value. Since Ticon plans to do this every year starting with year 2005, with a similar amount of factories, this capital gain is a recurring income and so should be part of Ticon's new profitability level. Ticon builds 40 to 50 new factories a year and this number is only restrained by the companies capital at hand. For now Ticon cannot keep up with demand and it may be several years before it slows down as there seems to be ample demand among global and local producers to rent rather then buy factories.
Hence, for the foreseeable future Ticon will be selling off the new factories it builds yearly, and yet keep a core portfolio of say 100 to 120 for themselves. This factory sale is anticipated to be a yearly event. Therefore I view a most recent Bualuang report by Khun Sumek, as a bit naive as it does not incorporate the expected 400 to 500 million in capital gains -in its expected year 2005 Ticon earnings forecast. Most other local broker reports I saw don't even mention any gains from this new and now already announced property fund.
Surely this is not just an extraordinary unusual gain, as it is expected to happen every year for some time. Bualuang, like me, expects Ticon to realize 400 to 600 million Baht in capital gains on these factory sales next year, but then does not incorporate these in their earnings projections. As if these gains are not real or not recurring.
Ticon is also expected to generate some new management fees from the administration of these properties, after they are sold to the new property fund. Hence the core operating EPS for next year at 0.60 to 0.65 is rather conservative and could well be higher.
500 million Baht of capital gains from the expected recurrent sale of factories, translates into 1 Baht per share of earnings, as Ticon has just about 500 million shares outstanding. Add to this Ticon's expected core operating earnings from its normal business estimated at around 0.65 for next and you got EPS of 1.65, or a year 2005 p/e of only 4, based on Friday's closing price of 6.60.
If Ticon earns anywhere near this number of 1.65 per share next year, we can all expect a handsome dividend perhaps as high as 0.70 or 0.80, per share? This would be 11 or 12.1% on the current stock price. Nobody knows yet what sort of dividend Ticon would pay the common shareholders. But it does have a rather generous dividend policy. (The current dividend rate of 0.40 per share translates into 6% on the current price or nearly double the average stock on the SET. Ticon since its IPO has paid dividends twice a year, the latest one being 0.20 for 6 month operations. Hence I expect another 0.20 this year.)
***
In a famous book called "The Mystery of Capital, why capitalism triumphs in the West and fails everywhere else." the respected author Hernando De Soto explains so very well what it means to transfer assets into capital. In this important work written by an academic "third worlder", (which The Economist magazine called "the second most important think thank in the world"), the author explains in great detail why many developing countries remain poor. The single biggest reason is that dead assets by the poor (i.e. citizens on the fringes, like squatters)' remain exactly that, dead assets. These folks most often don't have proper land title and or, they are not operating legally mostly due to unfair and excessive government red tape…,they so cannot capitalize on their assets in anyway shape or form. This, according the this author, is the single biggest reasons by far why a developing country cannot maximize its potential and "grow up to developed status". Reading this book made me realize in a way that what Ticon is doing now, transferring assets into capital, is a significant step to increasing shareholder value…and that this value increase has not yet sunk in, on the proper valuation on Ticon.
Hence, even while Ticon increased 10% in market value since I first pounded the table here on October 27, I with no hesitation still call Ticon shares "a strong investment buy", in my own view. A solid place to park serious capital until the SET wakes-up again and the bull market charges again forward. Then, by the 2 Q of 2005 the Ticon property fund will most likely be formed and investors can chose to go for the expected around 7% dividend yield of this fund, and or stick to Ticon common shares. But that is next years story, yet to be evaluated.
I like to view an ownership of Ticon common shares the same as an indirect ownership of 140 rented factories, yielding high income and diversified all around the greater industrial Bangkok metropolis. In this way, Foreigners as well as Thai citizens can own valuable land and much sought after factories. I think soon we will hear allot more about Thai property funds -and why they are/will become rather very popular here.
Best Regards,
Paul A. Renaud.
