Ticon's long stock price consolidation coming to an end?
Thailand resurging on being a competitive manufacturing center.
Due to strong inflation, higher wages, pollution, water shortage and broad cost escalations among principally the Chinese coastal zones and cities, Thailand now returns on the global scene as relatively low total cost manufacturing center.
Due to infrastructure bottlenecks and these getting worse, Vietnam has for now outgrown itself -and Thailand remains logistically and total cost wise very competitive to Vietnam. With global food prices soaring and these ever closer related to energy prices, Thailand remains one of the world's biggest food producer and so in the macro sense will benefit from this. I see higher sustained global food prices along with a resurgence of Thai manufacturing competitiveness the driving force to better times ahead.
There is a new comprehensive research piece circulating now showing that in fact Thailand remains a very competitive manufacturing center, and ever more so post the Chinese cost escalations. Ask yourself again, or any seasoned Thai analyst, how many big/large cap's are there on the SET which manufacture things -or grow food? Very few!
The reality remains (and perhaps stronger then even in the past) that if you want high growth in earnings, low valuation and above average in dividends, you simply must focus on the smaller and mid cap segment. This is where here the real wealth creation action remains regardless what the local brokers or institutional investors would like us investors to believe.
“I agree with you with regard to Thailand’s cost advantage as a manufacturing location.” A senior Manager from Ticon.
Ticon in recent years has been a formidable performer in the first smaller cap and now mid cap segment of the SET. I advocated a strongest buy possible on Ticon shares in late 2004. Renting factories to an ever growing diverse global manufacturing clientele and then, building on its strength to diversify into broad level of logistics and warehouses etc. has been nothing short of a big success.
However in recent times Ticons’ stock price has been stale and its yet to be seen if the shares will continue to stagnate on the SET by being perceived as “a boring” mid cap. Not true, but so many things in life are about perception rather then reality.
Management is able, professional and ethical -but only time will tell if they can re-innovate with shareholder financial sweeteners so to rejuvenate the stock price? The risk is here, rather then its fundamentals which remain strong. For example the company could broaden its global road-shows to attract non-subprime market seeking world class investors. And it could issue free warrants, buy back some of its own shares, issue convertible debentures and/or stock dividends etc…
As you know the stock price of Ticon has not moved for almost 18 months, despite favorable comments by brokers’ with target prices up to 28 Baht. In spite of a bit of a slow down in factory leasing during the middle part of last year this company once again ended last year with record results for 2007.
If the removal of capital controls last month did not have any noticeable effect on TFUND or TICON, this was possibly because the merits of TFUND in a low-interest climate had already been recognized, trading as it was at an 8 or 9% premium to PAR and thereby demonstrating healthy yield compression. The appetite for TFUND in the retail banking market during the 3rd tranche sale was even higher than the company anticipated. It is clearly an advantage to be able to offer new units internationally now that the capital controls have been removed. The TFUND has been one of the best price and yield performer to date of any Thai REIT. I have been a long fan of TFUND for high income and safety of principal seeking investors -and its total return has to date has been in the double digit.
The factory market remains good, and they continue to complete about one factory a week. In addition, Ticon plans are well on the way to develop 400,000 sqm of logistics space in 3 developments at Bangna, Wangnoi and Laemchabang. These warehouses have been leasing well and, by the end of last year were in a net pre-leasing position. With a longer overall development period (because of the additional infrastructure works, as compared with factory development) it has initially been slower to complete, but now the rate of completions is increasing. None of these properties have yet been sold to TFUND.
Ticon does not interfere with its stock share price nor would they seek to artificially increase the share price. Maybe the company should do more to broadcast its success – particularly at this time in related to our logistics developments – but they do provide measurable evidence of the company’s progress to anyone who enquires, and this is also available on their website.
There has been a notable change in its shareholding structure as they have grown, with a handful of major international institutions taking the place of retail investors. With this change, liquidity has suffered in recent times. Ticon used to have an average trade of about 2 million shares per day, which has now been reduced to an average of little more than 10% of this. It is clear from their roadshow discussions that this is an obstacle for new would-be large investors. So what is Ticon doing about it? I hope to have more insights when I visit them again next month.
If there is some selling in the market of recent (?) – maybe as a result of US sub-prime issues – then perhaps this gives more opportunity for new investors to gain a position or for existing ones to increase their holdings.
In the 5 years after listing, TICON’s share price increased 5 fold, and long-term investors have been well pleased. Its tripled in value since I turned maximum bullish in late 2004. This rate of increases would be difficult to continue over the next 5 years, but the company is clearly planning for sustainable growth and one could anticipate that long-term investors will likewise be please with their earnings performance over the next 5 years. Even if the share price hasn’t moved in the past 18 months, investors have been receiving a 6.3% dividend yield.
As for myself I finally cooled off on Ticon when the price ran above 20 in early ’07, and while never giving-up found better timely values elsewhere last year. Early this year I stated here that the long price consolidation period might well be coming to an end -and likely resolving itself on the upside. But what is the catalyst to get Ticon woken-up?
Ticon (19.1) is trading at a p/e of 10.5 on my earnings estimate of 1.75-1.80, for year 2008.
Trailing p/e is 11.5 for '07, as the company reported 1.64 EPS for last year. The dividend is 1.20 Baht per share and so the yield is just about 6.3%, or considerably higher then the SET average yield. Ticon will go XD in the first week of May and pay the cash dividend on May 16. Goldman Sachs and Morgan Stanley combined own more then 50% of the Thai NVDR’s outstanding.
As reported in the just recent member article, my view now is that the long Ticon price consolidation is likely coming to an end. The stock price could easily appreciate 20% over the next 12-15 months and so along with a couple of yearly dividends could bring the total return approaching 40% by say mid 2009. Some (or much) of this depends on management getting out of the box on initiating shareholder value by enhancing innovativeness and broadening roadshows. As SET mid cap's have a hard time getting attention.
Best Regards
Paul A. Renaud.
