Ticon, an update from a company visit
Ticon (9.7). My enthusiasm remains in tact. I firmly believe these shares will continue to beat the lethargic SET benchmark index, whose performances has been disappointing for some time. To date it was by far the right move to hide out the SET's yo-yo performance -with a solid position in Ticon.
The excitement continues at Ticon and I remain firmly convinced that all remains in place for this firm to earn some 1.55 per share this year, which I have been projecting for some months now. At Ticon's current market price of 9.7, this translates into a year 2005 p/e, of around 6.4.
Ticon has a recent history of paying a substantial portion out in cash dividends, hence an interim dividend of 0.60 (to be paid twice a year) is not inconceivable. At the current market price this would translate into a current yield of 12.3 %, or about 4 times the SET average expected dividend yield for this year! A yearly dividend to come of say 1 Baht (say 2 times 0.50) would result in a current yield of 10.3%. Ticon pays dividends usually every August and April.
The first quarter earnings should be released by May 16 '05 and will show some operating earnings growth, as compared to last year. (During the first quarter of '05, Ticon sold 1 factory).
The large capital gain to be realized from their 39 factory sales to their first fund will be booked in the second quarter. The capital gains from the factory sales are expected to be above 800 million Baht! However since Ticon retains a 33% ownership in the new TFund, the actual realized gains will be closer to 600 million Baht, or around 1 Baht per share. This is right around my initial estimate -and hence a confirming positive.
The company is now also seriously planning to increase their first property Fund to over 4 Billion Baht (from their current 1.7 Billion Baht) -so to move their fund above a market value of 100 million US$. As this is often the minimum size requirement by larger global institutional investors and so increasing the size of their first fund would so clearly attract many more institutional investors. This would require the approval of all unit holders. There is no reason why unit holders would not vote favorably on this, as this action would clearly increase the overall liquidity of the fund, besides its institutional appeal and in time market price of the units.
Hence I expect another 800 million capital gain or more "windfall" to be realized by the first quarter of next year 2006. I stress that "windfall" is here noted in quotation marks as Ticon has stated all along that it plans to issue a new/or expanding property fund every year for several years to come.
Since Ticon is planning to build and lease some 65-70 new factories every year and beyond, selling of 40 to 60 of those every year, is clearly so not depleting Ticon's property asset base.
In time the factory leasing market demand may get softer and so building of new factories more subdued. But by then, I expect the fee income from managing all these factories for their various funds (and their tax free dividends received from these funds, since they plan retaining around a 1/3 ownership of each fund) will be substantial and probably even more then the current operating income from currently leasing these factories.
The T-Fund must not be compared to a Thai bond equivalent for three key reasons:
1) The yield of the T-Fund at 10 Baht per unit (the offering price) is 7.5%, or substantially above the interest yield for local Bonds. And since the income is in dividends it demands only a 10% withholding tax, instead of a 15% withholding on interest income for Bonds.
2) The income to the T-Fund will increase in time as leases are contracted only at most for 3 years, hence it offers an inflation hedge. When a lease comes up for renewal it invariably gets renewed at a slightly higher price. While there cannot be any iron solid guarantees for this, I do expect the annual dividend to increase over time to unit holders. Not so on a bond.
3) In most developed countries the yield on such real estate investment trusts is only 1- 2.5% above the current yield on government bonds. The T-Fund has an indicated yield of 7.5% or at least 3% well above the Thai Bond rate.
While no doubt more property funds will come to market on the SET over the next year, few if any will match the broad diversification of the Tfund. And if the new Tfund increases its size to above 100 million US$, as is now planned, it might well become the largest most actively traded of them all. The local industry benchmark.
Today, I retain and here reiterate my strong buy view on Ticon's common shares -and the Tfund for more conservative oriented investors which seek high current income along with more stability of principal.
Best Regards,
Paul A. Renaud.
www.thaistocks.com
