TRIS Rating has assigned a rating of “A” to the proposed issue of up to Bt1,600 million in senior debentures of TICON Industrial Connection PLC (TICON). At the same time, TRIS Rating has affirmed the company and the current senior debenture ratings of TICON at “A”. The outlook remains “stable”. The ratings reflect the company’s proven record of developing ready-built factories (RBFs) and warehouses for rent, plus the recurring cash flows generated from rental contracts. However, the company’s substantial capital expenditures, increasing competition in the warehouses for rent segment, plus the uncertainty of the economic recovery, which affects investment activity worldwide, are the rating concern. The “stable” outlook reflects the expectation that TICON will be able to maintain its leadership position in the niche market of providing rental factories and warehouses. Despite making heavy investment to build new warehouse space and RBFs, the new locations will help diversify TICON’s portfolio and make it less reliant on its assets in Ayudhya province.
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 expanded its business scope to provide warehouse space for rent in 2005. As of December 2013, the company’s portfolio comprised 78 leased factories and 33 leased warehouses, with leased space totaling 368,763 square meters (sq.m.). Its facilities are located in major industrial estates and along the main logistics routes in Thailand. During the past few years, approximately 30% of TICON’s total revenue was generated by the rental of factories and warehouses. The major portion of revenue (more than 60%) came from selling assets to property funds. Revenues from the sales of assets to the property funds had been about Bt2,000 million per year. This amount increased to Bt4,300 million in 2012 and Bt5,500 million in 2013.
TICON’s major shareholders remain Rojana Industrial Park PLC (20.6%), City Realty Group (6.6%), and TICON’s management (6.5%). The company’s competitive advantage stems 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. Presently, the company provides RBFs for rent in 15 locations and provides warehouses for rent in 16 locations. TICON remains the leading provider of RBFs in Thailand, according to CB Richard Ellis (CBRE). TICON and its property funds had a combined market share in leased factory area of 54% as of September 2013. This share is far higher than competitors such as Hemaraj Land and Development PLC (19%), Pinthong Industrial Park Co., Ltd. (11%), Amata Corporation PLC (9%), and Thai Factory Development PLC and Thai Industrial Fund 1 (6%). Moreover, TICON is one of major providers of warehouse space in Thailand. According to CBRE data, as of September 2013, leased warehouses of TICON and its property funds accounted for 37% of the total leased warehouse area, next to WHA Corporation PLC (54%).
For 2013, TICON’s total leased area increased by 27%, rising from 518,948 sq.m. at the end of 2012 to 659,208 sq.m. TICON sold 290,445 sq.m. of rental space to the property funds in 2013. The growth in leased area came from a 23% increase in leased space in the RBF portfolio and an 31% increase in leased space in the warehouse portfolio. The growth was driven by the rising demand for ready- built factory space in eastern Thailand plus rising demand for logistics warehouses from logistic providers and consumer products industry .
The amount of leased area and rental income increased in 2012 through 2013. Despite the rises, the occupancy rate (OR) for all of TICON’s tenants, excluding pre-leased areas, decreased to 55% at the end of December 2013, compared with 73% at the end of 2012 and 94% at the end of 2011. The decrease in the OR was primarily due to TICON’s aggressive expansion of warehouse space and RBFs in new locations during 2012 and 2013, and the high vacancy rates of properties in previously-flooded areas.
TICON’s rental income improved during 2012 and the first nine months of 2013. Rental income rose by 20% to Bt1,053 million in 2012, from Bt880 million in 2011. For the first nine months of 2013, rental income continued to grow, rising by 12.4% year-on-year (y-o-y) to Bt863 million. The gross margin of rental income rebounded to 76% in the first nine months of 2013, from a record low of 63% during the post-flood period in 2012. The increase in the gross margin was attributed to a rise in leased area, particularly in RBF space, plus rental fee adjustments, and a reduction in flood-related renovation expenses. The gross margin was also higher because TICON reclassified some properties, which will be sold to the property funds and/or real estate investment trusts (REITs), as non-current assets held for sale in May 2013. After the reclassification, the assets are no longer depreciated. Excluding the effect of the asset reclassifications, the gross margin of rental income for the first nine months of 2013 was 69%.
Since 2011, TICON’s capital expenditures have increased substantially. The company has expanded its RBF and warehouse portfolio in the eastern region and other major provinces, in order to serve rising demand in these regions. As of September 2013, TICON’s debt level stood at Bt17,032 million, rising from Bt8,757 million as of December 2011. The company’s total debt to capitalization ratio deteriorated to 68.7% at the end of September 2013, from 60.4% at the end of 2011. TICON’s leverage is expected to remain moderately high because the company plans to spend about Bt9,500 million for capital expenditures in 2013 and Bt7,000-Bt8,000 million per year in 2014 and 2015. Most of capital expenditures in 2013 will be used to buy land in key provinces and along main logistics routes, such as in Khonkaen province, Suratthani province, and along Bangna-Trad road. However, TRIS Rating expects the company’s capital structure will improve going forward because the capital expenditures will be funded partly by the proceeds from the sales of assets to the property funds and/or REITs. In December 2013, TICON sold factories and warehouses worth about Bt5,515 million to its property fund.
Up to Bt1,600 million senior debentures due within 2024 A Rating Outlook: Stable
TRIS Rating Co., Ltd./www.trisrating.com Contact: santaya@trisrating.com, Tel: 0-2231-3011 ext 500/Silom Complex Building, 24th Floor, 191 Silom Road, Bangkok 10500, Thailand Copyright 2014, TRIS Rating Co., Ltd. All rights reserved. Any unauthorized use, disclosure, copying, republication, further transmission, dissemination, redistribution or storing for subsequent use for any purpose, in whole or in part, in any form or manner or by any means whatsoever, by any person, of the credit rating reports or information is prohibited. The credit rating is not a statement of fact or a recommendation to buy, sell or hold any debt instruments. It is an expression of opinion regarding credit risks for that instrument or particular company. The opinion expressed in the credit rating does not represent investment or other advice and should therefore not be construed as such. Any rating and information contained in any report written or published by TRIS Rating has been prepared without taking into account any recipient’s particular financial needs, circumstances, knowledge and objectives. Therefore, a recipient should assess the appropriateness of such information before making an investment decision based on this information. Information used for the rating has been obtained by TRIS Rating from the company and other sources believed to be reliable. Therefore, TRIS Rating does not guarantee the accuracy, adequacy, or completeness of any such information and will accept no liability for any loss or damage arising from any inaccuracy, inadequacy or incompleteness. Also, TRIS Rating is not responsible for any errors or omissions, the result obtained from, or any actions taken in reliance upon such information. All methodologies used can be found at http://www.trisrating.com/en/rating_information/rating_criteria.html.