Ticon visit, another update.
The below was posted in our member lounge on February 21 "06:
"I just re-visited with Ticon and on any dip below 15 currently, I today re-affirm my "firm buy view" on Ticon!
The reason:
Ticon is going to post a huge capital gain in the 1st quarter. This is not well understood by the market. As the second tranche of the TFund will be completed before the end of March, or 1st quarter. This the market knows -but the market underestimates the size of the gain on the sold factories to the TFUND. (second round).
The capital gain is likely to be close to 650-700 million this time (vs. 440 Mill for the first round of TFund). This is so because Ticon will own less of of the second TFUND tranche, and so book a higher profit then the market realizes. Remember in the first round (last year) Ticon retained a 30% ownership of the TFUND, this time around it will be less and so gains more.
Also, the mkt. is starting to realize that such factory sales to TFUND is a yearly recurring event, as I told you 1 1/2 years ago. But it took some time for investors and broker research to understand this. Hence EPS for year 2006 may well be close to 2 Baht and so the dividend raised.
On this SET correction (due to politics), its a good time to bargain hunt back any Ticon sold shares, or start nibbling for those whom missed it to begin with! "
Member article as posted on February 25 "06.
It must be further appreciated that the next earnings growth driver, their new logistics park expansion, should fuel earnings higher into year 2007 and beyond. As the logistic park gets developed, Ticon plans to sell off properties of this park to the TFUND as well, in the future. (The TFund is of course Ticon’s, year 2005, own created real estate investment trust fund and is about to be more then doubled in size).
Many properties in the new logistic center are expected to be strategic warehouses and these are rather compatible with an REIT concept. (TFUND). It appears to me that Ticon will have the new factory rental growth (and sales to the Fund, as now) -and on top of this newly created properties for lease, through the logistic park.
There is no question in my mind that the logistic sector for Thailand will expand rapidly in the say next 3-6 years and that Ticon here, as in the plant factory rental business, will be the leader. The outsourcing trend around the developed world is far from complete or exhausted and there could well be an increased spillover demand from China, if that country experiences further rapid cost increases as I expect. Many coastal areas in China are already loosing business due to high costs and other difficulties. Ticon is not expanding but in its core business.
Then there is Japan, which unquestionably is now on a broad recovery mode. The Japanese are Ticon’s biggest customers and if Japan is doing better this can only be another positive. It might well be that Japan prefers doing mroe business in Thailand rather then China, this is my own view.
Current political uncertainties are of little concern to Ticon’s business, as if foreign companies are more reluctant at the margin, due to politics, they will even more so consider renting, before buying. While I wont go so far as saying political uncertainty is a true net positive, it might well be.
My own internal estimate is for Ticon to realize a 660 Million Baht gain on the next tranch of factories sold to TFUND. This gain will be realized and recognized in the 1 Q of 2006.
As the TFund just went XA (ex-all) last week, with its new rights offering, so to mobilize some new 2 Bill. Baht in further factory sales to the TFUND. The TFund will so become more then twice as large as before and by being a 100 mill US$ fund, will/should command a higher valuation. This is the key reason why I also like the TFUND (10.2) and why I would subscribe to the newly issued units of this fund. Especially with savings earmarked for less risk The TFund pays a 0.195 dividend every quarter, or around 7.7% annualy. I expect this dividend to slightly rise this year and over future years.
How I derive at my earnings estimate:
160 Million will come from:
1) an 80 mill. gain back on its expected dilution after the second trance is done. Ticon is expected to own less of the TFUND in percentage terms, after the next tranche is completed.
2) an 80 mill gain is expected in addition to the normal gain due to the second tranch, which is resulting in Ticon owning less of this portion as well.
This is in addtion to the expected 500 million gains to be realized from selling some 44 factories to the TFund. This is Ticons’s secound round of selling factories to this fund.
The company earned 680 mill last year which is 1.29 per share, this report was just announced last week. Since around 430 mill was the capital gain from the factory sale to TFUND, last year, some 250 million is from operating income and fees from managing the properties in the TFUND.
I expect combined those revenue generators to increase say 15-20% in year 2006. This I derive 1) taking in consideration that the company has stated a 15% increase in new factories build to come on stream this year and 2) due to the TFUND management fees will more then double, as the TFUND will more then double in its size. 3) I also expect a minor profit contribution from the new logistic sector, which should yield some initial results late this year. 4) Sometimes a factory tenant has the option to buy a factory, (both tenants of Ticon and tenants of the Tfund), in that case the profit realized on such a sale will be realized as a capital gain. As the company has ever more factories more occasional sales should take place.
Bref, I think its conservatively reasonable to expect Ticon to gain about 300-320 mill. in straight operating gains this year.
If I take 300 million and add the expected capital gains of 660 million (as explained above), I come to a net profit of close to 1 Bill Baht. Since there are 530 million shares outstanding, this comes to an EPS estimate of 1.86 EPS, for year 2006. This would be a 43% increase on the 1.29 Baht per share, Ticon earned last year. (I note as a sideline that a year ago or so I expected Ticon to earn 1.30).
Some risks I can identify are:
---The logistic center does not produce earnings until year 2007. (Possible, but not counting much on this in my forecast anyway).
---The growth rate of factory rentals slows down, just as Ticon expands into its logistic center. (Very unlikely as I view it. As demand keeps outstripping supply and Ticon is the clear leader).
---Interest expense escalates up, eating into profits, as Ticon finances its logistic park. (Not a major concern, remember Ticon gets a huge cash infusion every time its sells off a tranche of factories to the TFUND).
---Interest rates move up and it becomes impossible to attract new "fixed income" investors to the TFUND. (Worst case then is Ticon omits a year or two on selling factories and so keeps building up a broad new inventory to go to market, when the climate is ready again.
It must be appreciated that the TFUND has rent escalation provisions built in. Every 3 years on average a factory lease is up for renewal, most often rents go up. Some leases in the fund are up this year already. Lease increase are especially so in a higher inflation environment associated with higher interest rates. Hence the dividend on the TFUND can be expected to creep upwards, as the rents increase over the years. I could see an annual dividend of the TFUND to be around 1 Baht per unit, in 3-5 years as compared to 0.80 now. Hence the annual yield would then be 10% as compared to 7.6% currently, supportive somewhat to a higher interest rate environment. Or, if Thai & global interest rates move lower, then resulting in perhaps a gain with a minor appreciation of the unit price.
Of course it could one day that there is a glut in factories and rentals comes down, but I view this concern as far to premature and willing to take that risk. Remember, unlike some other REIT’s here, the TFUND owns the factories and land outright.
Because the TFUND is about to more then double in size, I have stated here in recent months that I like it, as more liquidity should bring higher valuation. It deserves some of your long term savings alternatives. Since first stating this, the units have already increase some 5%.
Ticon earnings per share should grow from Baht 1.29 last year to 1.85 this year, and in year 2007 to perhaps 2.30 - 2.50, .This makes me continue to believe that at a year 2006 p/e of 8.5 with an expected dividend yield of 6.4%, the stock is not expensive. After all, the medium term annaul earning growth rate is so expected to be some 35% -and Ticon’s p/e is still below market averages.
I remain positive on Ticon stock and refuse to believe "its fully valued" like some other brokers have just recently suggested. While my previous "maximum bullish stand" on Ticon has now been realized and I do recognize some may want to take some money off the table, only so to diversify. In fact, that is what I have been doing in the latest "favorites model portfolio". This model, I will update by month end.
Best Regards,
Paul Renaud.
www.thaistocks.com
PS.
The company has just declared a 0.60 Baht dividend and pays dividend twice per year. If the next interim dividend (to be announced around August) is around 0.40. This so would yield 6.4 percent on the current market price of around 15.7.
