TICON: Time to SELL

[C30207060]

When Financial Discipline is Relaxed

I used to recommend this stock when it was around Bt8.0 on the expectation that it would go up to Bt17 -19 as the company came up with capital raising revolutionary in early 2005. It was true after the company successfully found the TFUND, a type I property fund, to buy its rental factories. TICON hit a high at Bt19.0 in March 06, taking 13 months to yield return about 150%. However, I first saw some changes in the companys financial discipline when it announced an interim dividend of Bt0.60 per share, approximately 66% of Bt1.10 EPS the company made in 1H05. It would be fine for the company to pay out dividend at that rate if most of the profit was not made by the disposition of its core operating assets, rental factories. I used to ask TICONs managements why the company paid out dividend that much; if the business prospect was so good, they should retain equity capital to invest in those potentially high-return projects. The answer was that there was no need to retain cash as they had property fund as a capital raising tool and they could continue to borrow from the bank in financing land purchases and constructions. They also told investors not to worry about the equity raising in the future as the can draw fund by securitizations via TFUND. So far the TICON has raised about Bt4,000mn by selling about 50% of its factories to the property fund. Another reason of high dividend is that TICONs top managements and major shareholders own the stocks at a sizable portion and would need cash for paying back the loan.

August 11, 2006 TICON announced an increase of registered capital of the Company from 564.62 million Baht to 673.62 million Baht by means of the issuance of 109 ordinary shares by private placement. The company claimed that there were exciting projects that needed financing. In addition, the company also did not pay an interim dividend which it always pays. This shows that the company is shortage of cash at the time it needs and has to raise equity. In fact, this is an effect of relaxed financial discipline that made the firms financial leverage soar, causing difficulties to borrow and higher interest rates charged. Soaring financial cost results in rising cost of capital and, at the same time, diminishing firm value. The private placement would not be necessary if the company maintain conservative financial discipline and keep its financial structure firmed. They would have retained more cash proceed from selling assets with the company rather than paying that much out. Investors are subject to 10% withholding tax on dividend and would be more appreciate to put money with the firm to generate growth for them.

As assumptions on the companys financial policy has been violated and the stock prices seem to be over-optimistically valued now, it would be time to sell the stock.

[woody]

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