TRIS Rating Assigns “A/Stable” Rating to Senior Unsecured Debt Worth Up to Bt1,550 Million of “TICON”

Wednesday 14 January 2015 10:08
TRIS Rating has assigned a rating of “A” to the proposed issue of up to Bt1,550 million in senior unsecured debentures of TICON Industrial Connection PLC (TICON). At the same time, TRIS Rating has affirmed the company and current issue ratings of TICON at “A”. The outlook remains “stable”. The 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. However, the ratings are partially offset by a rise in the company’s financial leverage caused by hefty capital expenditures. 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 occupancy rate and properly manage its funding needs in order to keep its leverage at a manageable level as it expands.

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 and started providing warehouse space for rent in 2005. As of December 2014, the company’s portfolio comprised 60 leased factories and 57 leased warehouses, with leased space totaling 435,948 square meters (sq.m.). Its facilities are located in major industrial estates and along the main logistics routes in Thailand.

At the end of August 2014, TICON’s major shareholders remained Rojana Industrial Park PLC (24.3%), City Realty Group (7.2%), and TICON’s management (5.8%). The company’s competitive advantage stems from its proven record of providing quality RBFs to customers and the cost advantage it obtains by using an in-house construction team to build standard factories at competitive prices. TICON remains the leading provider of RBFs and warehouses in Thailand, according to CB Richard Ellis (CBRE). At the end of September 2014, TICON and its affiliated property funds had a combined market share of 46%, based on leased area. This share is higher than its competitors, such as Hemaraj Land and Development PLC and its affiliated property funds (26% share), and Pinthong Industrial Park Co., Ltd. (11%). In terms of warehouse space, TICON is one of the two key firms offering warehouse space for rent business. TICON and its affiliated property funds supplied about 47% of the total warehouse area, as of September 2014.

In 2014, TICON added 288,142 sq.m. of leased area (before subtracting the space sold to the property funds), compared with an increase of approximately 135,000 sq.m. in 2013. The jump in amount of leased area in 2014 was largely driven by an increase in warehouse space in the Central area. The leased area in TICON’s warehouses increased by 264,852 sq.m. in 2014, compared with an increase of approximately 79,000 sq.m. in 2013. In terms of RBF, TICON’s RBF area increased slightly, rising by only 23,290 sq.m. in 2014. The demand for RBF space in flood-prone areas, such as Ayudhya and Pathumthani provinces remains stagnant.

Despite the rises in leased area, TICON’s occupancy rate remains low. The occupancy rate for all of TICON’s tenants, excluding pre-leased areas, was 57% at the end of December 2014, compared with 73% at the end of 2012. The low occupancy rate was primarily due to TICON’s aggressive expansion of warehouse space and RBFs it built in new locations during 2012 through 2014. TICON also has high vacancy rates at its RBFs in parts of Thailand that were flooded in 2011.

TICON’s revenue during the first nine months of 2014 was in line with TRIS Rating’s expectation. Rental income declined by 21% year-on-year (y-o-y) to Bt685 million during the first three quarters of 2014. The drop came because TICON’s sold a number of assets to the property funds in late 2013 through early 2014, and only a few of new tenants occupied rentable space in the first half of 2014. However, rental income is expected to rise before year-end because a number of pre-lease tenants, letting approximately 100,000 sq.m., moved into their leased spaces in the fourth quarter of 2014.

TICON’s gross margin remains healthy. The gross margin of rental income was 78.3% in the first nine months of 2014, compared with 76.2% during the same period of 2013. However, the operating margin (operating income before depreciation and amortization as a percentage of sales) dropped from 56.1% in the first nine months of 2013 to 51.1% in the first nine months of 2014. The drop was due to a difference in the revenue mix. TICON sold more assets to the property funds during the first nine months of 2014, compared with the same period of 2013. Revenue from selling assets to the funds generates lower margins compared with the margins from rental space.

During the past few years, TICON’s capital expenditures have increased substantially. The company has expanded its RBF and warehouse portfolio in the eastern region and in other major provinces, in order to serve rising demand in these regions. At the end of September 2014, TICON’s debt level stood at Bt19,105 million, up from Bt10,600 million as of December 2012. The company’s total debt to capitalization ratio deteriorated to 64.9% at the end of September 2014, from 57.3% at the end of 2012. The company plans to spend about Bt6,000 million in 2015. TICON’s leverage is expected to remain manageable because the capital expenditures will be funded in part by the proceeds from the sales of assets to the Real Estate Investment Trusts (REITs). In December 2014, TICON sold factories and warehouses worth about Bt4,200 million to its REITs.

TICON Industrial Connection PLC (TICON)

Company Rating: A

Issue Ratings:

TICON155A: Bt800 million senior unsecured debentures due 2015 A

TICON158A: Bt700 million senior unsecured debentures due 2015 A

TICON162A: Bt500 million senior unsecured debentures due 2016 A

TICON165A: Bt650 million senior unsecured debentures due 2016 A

TICON165B: Bt300 million senior unsecured debentures due 2016 A

TICON169A: Bt600 million senior unsecured debentures due 2016 A

TICON171A: Bt100 million senior unsecured debentures due 2017 A

TICON171B: Bt1,000 million senior unsecured debentures due 2017 A

TICON177A: Bt500 million senior unsecured debentures due 2017 A

TICON177B: Bt1,150 million senior unsecured debentures due 2017 A

TICON178A: Bt300 million senior unsecured debentures due 2017 A

TICON185A: Bt1,200 million senior unsecured debentures due 2018 A

TICON187A: Bt350 million senior unsecured debentures due 2018 A

TICON189A: Bt300 million senior unsecured debentures due 2018 A

TICON19OA:Bt620 million senior unsecured debentures due 2019 A

TICON191A: Bt600 million senior unsecured debentures due 2019 A

TICON205A: Bt500 million senior unsecured debentures due 2020 A

TICON217A: Bt800 million senior unsecured debentures due 2021 A

TICON229A: Bt1,000 million senior unsecured debentures due 2022 A

Up to Bt1,000 million senior unsecured debentures due within 2025 A

Rating Outlook: Stable