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TPARK Logistics Property Fund

Major tenant exiting: forecasts revised BUY

TPARK Logistics Property Fund

Big C not renewing; cut net investment income on lower occupancy: 2014 by 11%, 2015 by 7% and 2016 by 4%.

DPU also revised down to dividend yield of 6.3-6.8percent for 2014-2016

Long term outlook still positive backed by strong logistics industry and substantial growth in e-vommerce

No change in rounded TP; still BUY

What's changed? A discussion with TLOGIS's fund manager revealed that a major tenant, Big C, which accounts for 10% of its total portfolio, will not be renewing its contract in TPARK Wangnoi that expires at the end of July. At last check, TLOGIS has not yet found a replacement for the space.

Cut net investment income forecasts: 2014 by 11% to Bt319mn, 2015 by 7% to Bt343mn and 2016 by 4% to Bt360mn. Our revision is based on a new average occupancy rate assumption of 86percent for 2014 (from 96%), 91percent for 2015 (from 98%) and 95percent for 2016 (from 99%). The warehouse rented by Big C can be divided into four smaller ~6,000 sqm units; in our model, we assume none will be filled this year, three will be filled in 2015F and the remaining in 2016F. We note that our new forecast also includes Bt2mn repair and maintenance expense for when Big C leaves. Thus, excluding extra gain in 2013F, net investment income is expected to drop by 9% in 2014F, but then grow by 8% in 2015F and 5% in 2016F.

Higher payout ratio to sustain DPU. Despite the lower net investment income, we believe TLOGIS will maximize its dividend payout ratio since it still has excess cash from previous years that it can use if necessary. We have therefore assumed a payout ratio of 100% on net adjusted income in 2014F and 95% in 2015-2016F. This gives a new DPU of Bt0.77 (down 6%) in 2014F; Bt0.79 (down 7%) in 2015F; Bt0.83 (down 4%) in 2016F, an implied dividend yield of 6.3-6.8%.

Still positive on long term outlook. Based on NESDB data, the years 2005-2011 saw a rise of over 3,000 in registered logistics providers in Thailand, many of which are potential warehouse tenants. We expect AEC to spur this trend via heavier trade activities that will lead companies to outsource more of their logistics needs. Another plus is the rapid growth in e-commerce (Figure 5) that is being facilitated by the greater internet availability and this will generate greater demand for warehouse space in which to stock inventory. Since more than half of the fund's income comes from customers in the logistics sector, we remain positive on its long term outlook and expect earnings to continue to grow.

No change in valuation; maintain BUY. Based on DCF, our mid-2015 TP is still Bt13/unit due to rounding. Although IRR is slightly lower at 8.0percent from 8.1% previously, this is still 370bps higher than 3-5 year investment grade corporate bonds; 430bps above 10-year government bonds and 510bps above 12-month fixed deposits. Thus, with ETR still attractive at 13% and long term outlook still positive, we maintain our BUY rating on TLOGIS.

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