Bangkok--31 Jul--TRIS Rating
TRIS Rating has assigned a rating of "A" to the proposed issue of up to Bt2,000 million in senior unsecured debentures of TICON Industrial Connection PLC (TICON). At the same time, TRIS Rating has affirmed the company and the current senior unsecured debenture ratings of TICON at "A". The outlook remains "negative". The ratings reflect TICON's proven record of developing factory 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 lower investment activity and demand for factory and warehouses for rent.
The "negative" outlook reflects the company's weakening financial profile due to lower-than-expected operating performance and rising financial leverage. The outlook could be revised back to "stable" should TICON keep its debt to capitalization ratio below 60% and demonstrate significant, improvements in its debt serviceability. On the other hand, the rating could be downgraded if TICON's capital structure further deteriorates or the company requires longer time to restore its financial strength.
TICON is the leading provider of ready-built factories (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 June 2015, the company's portfolio comprised 67 leased factories and 80 leased warehouses, with leased space totaling 528,681 square meters (sq.m.). Its facilities are located in major industrial estates and along the main logistics routes in Thailand.
As of March 2015, TICON's major shareholders remained Rojana Industrial Park PLC (ROJNA; 43.5%), City Realty Group (7%), and TICON's management (5.8%). 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 32 locations.
TICON remains the leading provider of RBFs and warehouses in Thailand, according to CB Richard Ellis (CBRE). Based on amount of leased area in the RBF industry, the market share of TICON and its affiliated property funds/real estate investment trust (REIT) was 46% at the end of March 2015. In terms of warehouses for rent, TICON is one of the two main providers. TICON and its affiliated property funds/REIT supplied about 49% of the total rentable warehouse area, as of March 2015.
During 2014 through the first half of 2015, TICON added 280,156 sq.m. of leased area in 2014 and 90,283 sq.m. in the first half of 2015, compared with an increase of 180,000 sq.m. on average during 2011-2013. About 90% of total new leased area was from the warehouse segment. The leased area in TICON's warehouse segment rose by 248,666 sq.m. in 2014 and 84,233 sq.m. during the first half of 2015, compared with an average annual increase of 135,000 sq.m. during 2011-2013. The surge in demand for warehouse was from logistics service providers in the Central and the Eastern areas of Thailand. For the factory segment, TICON's RBFs increased by only 31,490 sq.m. in 2014 and 6,050 sq.m. during the first half of 2015. Demand for RBFs continues to stagnant in areas affected by the 2011 flood, which accounts for 23% of TICON's vacant area. The electronics industry had been one of the major demand drivers for RBF space. However, demand recently slowed markedly due to the technological changes in this industry. In addition, the current slowdown in the automotive industry has reduced demand for RBFs.
TICON's occupancy rate remains low. The occupancy rate for TICON's property, excluding pre-leased areas, was averaged at 57% at the end of June 2015, compared with 73% at the end of 2012. The low occupancy rate was primarily due to TICON's rapid expansion of warehouse space and lower-than-expected take-up rate for RBFs.
For the first quarter of 2015, TICON's rental income was Bt246 million, rising from a low level of Bt202 million during the same period of 2014. However, the gross margin for rental income softened to 69%, from 75% in the first quarter of 2014. The drop was due to more competition, and the higher proportion of rental income from warehouses. Warehouse space yields lower margins than RBF space. TICON's earnings before interest, tax, depreciation, and amortization (EBITDA) was Bt252 million during the first quarter of 2015, slipping from Bt522 million in the first quarter of 2014. The drop was mainly
because there were no asset sales during the first quarter of 2015, compared with the amount of asset sales worth Bt498 million during the same period of 2014.
TICON's cash flow protection has weakened since 2014. EBITDA interest coverage ratio was low at 2.9 times in 2014 and 1.3 times during the first quarter of 2015, compared with 4.5-7.0 times during 2010-2013. Funds from operations (FFO) to total debt ratio was weak at 9.3% in 2014 and 6.8% (12-month trailing basis) during the first quarter of 2015, compared with 10%-21% during 2010-2013.
Total debt continued to rise, climbing to Bt18,720 million at the end of March 2015, from Bt15,679 million in 2013 and Bt17,229 million in 2014 as a result of the hefty capital expenditures TICON made in an effort to diversify its property portfolio nationwide. At the end of March 2015, TICON's total debt to capitalization ratio was 62%, up from 60% at the end of 2014.
Looking forward, the company's leverage is expected to remain high. TICON plans to spend Bt50,000 million over the next 5 years (2015-2019) to expand its property nationwide and abroad. Nevertheless, the company has flexibility in raising funds. TICON can secure some of the funds it needs via property sales, which would help reduce its leverage and enhance its cash flow protection. TICON plans to sell assets worth approximately Bt3,300 million to REIT during the last quarter of 2015.
TICON Industrial Connection PLC (TICON)
Company Rating: A
Issue Ratings:
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
TICON181A: Bt1,550 million senior unsecured debentures due 2018 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
TICON195A: Bt1,000 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
TICON225A: Bt1,000 million senior unsecured debentures due 2022 A
TICON229A: Bt1,000 million senior unsecured debentures due 2022 A
Up to Bt2,000 million senior unsecured debentures due within 2025 A
Rating Outlook: Negative