TRIS Rating Co., Ltd. has affirmed the company and issue ratings of TICON Industrial Connection PLC (TICON) at “A” with “stable” outlook. The ratings reflect the company’s proven record in the ready-built factories (RBFs) and warehouses for rent plus the recurring cash flows from contractual rental income. The ratings also take into consideration the impact of massive flooding in Thailand on TICON’s operation. Even though the flooded properties constituted 42% of TICON’s leased spaces, most of the property damages are expected to be paid by insurer while its revenue loss is expected to last no longer than six months during October 2011 till March 2012. Due to its geographically diversified portfolio and strong recovery in manufacturing production in Thailand, TICON’s operation is expected to resume to normal level in the second half of 2012. The rating confirmation is to remove the CreditAlert with “negative” implication placed on the company and issue ratings of TICON since 14 October 2011, following TICON’s properties in the central area of Thailand which have been inundated with flood waters. The “stable” outlook reflects the expectation that TICON will be able to maintain its leadership position in the niche market of rental factories. Flood-affected properties are expected to return to normal operations in the second half of 2012. A promising investment outlook of Thailand should lead to increasing demand for factory and warehouse spaces in non-flooded prone areas.
TRIS Rating reported that TICON is the leading provider of RBFs in Thailand. It was established in 1990 and listed on the Stock Exchange of Thailand (SET) in 2002. The company has expanded its business scope and provided warehouse space for rent since 2005. As of March 2012, the company’s portfolio comprised 122 leased factories and 58 leased warehouses with a total leased space of 569,716 square meters (sq.m.), located in major industrial estates in Thailand. From 2005 to 2010, 27% of TICON’s total revenues were generated by rental factories and warehouses while the major portion of revenue (65%) came from selling assets to property funds. Revenues from assets sold to TICON Property Fund (TFUND) and TPARK Logistics Property Fund (TLOGIS) were Bt1,500-Bt2,200 million per year between 2005 and 2010. However, asset sales to property funds declined to Bt944 million in 2011 due to the severe flooding in late 2011.
TRIS Rating said, as of March 2012, TICON’s major shareholders remained Rojana Industrial Park PLC (Rojana) (21.5%), TICON’s management (7.3%), and City Realty Group (6.4%). The company’s competitive advantages stem from its proven record of providing quality RBFs to customers and its cost advantage in building standard factories at competitive prices by using an in-house construction team. TICON’s portfolio of RBFs and warehouses is geographically diversified. Currently, TICON provides RBFs for rent in 10 locations and warehouses for rent in six locations excluding site preparation. TICON remains the leader in the RBF business in Thailand. According to CB Richard Ellis (CBRE), TICON and TFUND had a combined market share in leased factory space of 64.6% as of December 2011. This share is far higher than peer companies, such as Pinthong Industrial Park Co., Ltd. (Pinthong 10.6%), Hemaraj Land and Development PLC (Hemraj 12.4%), Thai Factory Development PLC (TFD) and Thai Industrial Fund 1 (6.5%), and Amata Corporation PLC (Amata 5.9%).
During 2011, TICON’s total rental income grew just by 3% to Bt880 million in 2011 from Bt851 million. The severe flooding in Thailand had halted operations of TICON and its tenants in five locations since October 2011. The flooded properties comprised 58 leased factories and 12 leased warehouses totaling 229,874 sq.m., which accounted for 42% of TICON’s total leased area before the flooding. TICON lost rental income of Bt100 million in the fourth quarter of 2011 and postponed the planned sales of properties to TFUND from the fourth quarter of 2011 to 2012. Lastly, TICON recorded additional deferred income tax expenses of Bt72 million to reflect the announcement change in the corporate income tax rate in Thailand. The tax rate will change from 30% to 20%-23% in 2012-2014. These combined factors pulled its net profit down to Bt436 million in 2011, a drop of 47% from 2010. Earnings before interest, tax, depreciation, and amortization (EBITDA) decreased by 30% from 2010 to Bt1,269 million in 2011.
The delay in property sales drove TICON’s total debt to capitalization ratio to 60.4% in 2011 from 52.5% in 2010.
Even though demand for leased factories and warehouses in the flooded area has been slow down noticeably after the flooding period, the demand in non-flooded locations remains satisfactory. As of March 2012, TICON reported total leased area of 569,716 sq.m. or a net increase of 12,574 sq.m., excluding property sales, in the first quarter of 2012. The leased warehouses increased 19,649 sq.m. while the leased factories decreased 7,075 sq.m. The decline in leased factories was mainly due to the termination of customers in the flooded areas. Twelve factories renting a total of 27,025 sq.m. in the flooded areas terminated their rental contracts.
TICON’s operations have gradually returned to normal. As of 15 April 2012, most damaged properties under TICON’s responsibility were repaired and handed over to tenants. TICON’s rental income is targeted to return to normal level in the second half of 2012. Property damage from flooding of Bt199 million and lost rental income of about Bt50-Bt60 million will be reimbursed by insurance companies. Rental contract termination is expected to be lower in the subsequent quarters, after investor confidence gradually recovers. The government has announced flood relief measures, tax privileges, and the implementation of flood-protection systems at previously-flooded industrial estates. The outlook for RBF and warehouse demand remains positive, due to expectations of an economic recovery in Thailand. In addition, the value of projects submitted to request for the Board of Investment’s (BOI) promotional privileges during the first quarter of 2012, including Bt25,717 million of the flood-related projects, climbed to Bt231,000 million, a 107% year-on-year (y-o-y) increase. These investments will boost demand for leased factories, particularly in non-flooded locations in TICON’s RBFs and warehouses. This should more than offset the slowdown in the flooded area. TICON’s leverage level is expected to fall in 2012-2013, should TICON sell its industrial properties worth Bt4,200 million to property funds in 2012, doubling the amount of Bt2,000 million per year normally sold, said TRIS Rating. — End
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