TRIS Rating has lowered the company rating and the ratings of the senior unsecured debentures of TICON Industrial Connection PLC (TICON) to “A-” from “A”. The downgrade reflects weakening cash flow protection following continued hefty expansion and lower-than-expected demand for rental properties. At the same time, TRIS Rating has assigned a rating of “A-” to TICON’s proposed issue of up to Bt5,000 million in senior unsecured debentures. The proceeds from the new debentures will be used to repay existing debts and used for planned capital expenditures. The outlook remains “stable”.
The “A-” ratings reflect TICON’s proven record of developing ready-built factories (RBFs) and warehouses for rent, plus the recurring cash flows it receives from rental contracts. The ratings also take into consideration the slower-than-expected growth in the domestic economy, which may reduce investment activities and lead to slow demand for RBFs and warehouses for rent.
The “stable” outlook reflects the expectation that TICON will be able to maintain its leading position in the market of providing rental factories and warehouses. The company is expected to gradually increase its OR and properly manage its funding to keep its leverage at manageable level. The rating upside is limited over the next 12 months owing to slow economy and investment growth in Thailand, which would hinder demand increase for rental properties. However, the ratings upside will emerge should the company increase its OR noticeably and enlarge its cash flow base considerably on a sustainable basis. The significant improvement in capital structure is also a positive factor for the rating. In contrast, the rating would likely be downgraded should expansions further deteriorate its balance sheet or weaken its profitability.
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 in 2005 and started providing warehouse space for rent. As of December 2015, the company’s portfolio comprised 64 leased factories and 57 leased warehouses, with leased space totaling 474,903 square meters (sq.m.). Its facilities are located in major industrial estates and along the main logistics routes in Thailand.
As of March 2016, TICON’s major shareholders remained Rojana Industrial Park PLC (ROJNA; 43.6%), City Realty Group (7.0%), and TICON’s management (2.8%). The company’s competitive advantage stems from its proven record of providing RBFs and warehouses to customers. TICON’s portfolio of RBFs and warehouses is geographically diversified. Currently, the company provides RBFs for rent in 18 locations and provides warehouses for rent in 33 locations. TICON remained the leading provider of RBFs and warehouses in Thailand for 2015, according to CB Richard Ellis (CBRE). However, the market share of TICON and its affiliated property funds/TICON Freehold and Leasehold Real Estate Investment Trust (TREIT) in the RBF industry, based on leased area, declined during the past years. TICON's market share declined to 50% as of December 2015, from 66% in 2010. However, TICON’s market share still outpaced the share of the second-largest leading providers of RBFs, which had 19% market share. In terms of warehouses for rent, TICON is one of the two main providers. TICON and its affiliated property funds/TREIT supplied about 45% of the total rentable warehouse area, as of December 2015.
In 2015, TICON added 169,262 sq.m. of leased area (before subtracting the space sold to property funds/ TREIT), 86% of total was from the warehouse segment. The leased area in TICON’s warehouse segment rose by 146,387 sq.m. in 2015, compared with an average yearly increase of 164,000 sq.m. during 2011-2014. The demand for leased warehouse area in 2015 was largely driven by healthy demand from logistics providers in the central area and area proximity to Bangkok. However, TICON’s RBF area increased modestly in 2015, rising by 22,875 sq.m., compared with 30,000-50,000 sq.m. increase in 2013-2014. The electronics industry, which had been one of the major demand drivers for RBF space slowed markedly due to the technological changes in this industry. In addition, the current slowdown in the automotive industry has reduced demand for RBFs. The stagnant demand for the area affected by the 2011 flood, which accounts for 16% of total TICON’s available area for lease, also held back the net increase in leased area for RBFs.
Despite the rises in leased area, TICON’s occupancy rate (OR) remains low. The OR for all of TICON’s tenants, excluding pre-leased areas, was 56.2% at the end of December 2015, compared with 73.4% at the end of 2012. The low occupancy rate was primarily due to TICON’s rapid expansion of warehouse space, and low take-up rate for its RBFs.
TICON’s rental income slightly increased, rising by 9% year-on-year (y-o-y) to Bt1,049 million in 2015 from Bt966 million in 2014 following the increase in net leased area and a lower number of assets sold to TREIT in late 2015. Revenue from assets sold to Real Estate Investment Trusts (REITs) and property funds remains the largest portion of the company’s revenue. Revenue from asset sales was Bt3,037 million in 2015. The sales value in 2015 was lower than the sales value of Bt4,500 achieved during 2012-2014. TICON’s profitability continued its downtrend in 2015. The gross margin of RBFs declined to 77% in 2015, from 81% in 2013. The gross margin of warehouse also edged down to 67% in 2015 from 71% in 2013. However, the lower mix of narrower-margin sales revenues improved TICON’s operating margin (operating income before depreciation and amortization as a percentage of sales) to 32.1% in 2015 from 29.3% in 2014. TICON’s funds from operations (FFO) declined to Bt1,451 million in 2015, from approximately Bt1,866-2,911 million in 2012-2014.
TICON’s debt jumped significantly during 2013-2015, from Bt10,600 million at the end of 2012 to Bt22,009 million at the end of 2015. The rise in the debt level was due to the hefty capital expenditures TICON made in an effort to diversify its property portfolio nationwide. At the end of 2015, the debt to capitalization ratio was high at 65%. Cash flow protection continued to be weak in 2015. EBITDA interest coverage ratio was lower at 2.4 times in 2015 and 2.9 times in 2014, compared with 4.5-6.0 times during 2012-2013. FFO to total debt ratio was weak at 6.6% in 2015, and 10.8% in 2014 compared with 18.6%-19.8% during 2012-2013.
Looking forward, TICON plans to spend Bt2,600 million per year in 2016-2018. During the period, TICON plans to sell assets worth approximately Bt2,500 million per year to REITs. As a result, the company’s leverage will remain high, hovering around 60%-65% over the next few years.
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