Thoresen Thai Agencies

Thoresen Thai Agencies Plc (TTA)

Investment thesis: Management discussions at the analyst meeting last Friday provided us with a more optimistic view regarding TTA’s offshore service business, though bearishness permeates the dry bulk shipping market. We think that the bearish outlook for the dry bulk shipping market together with concerns about the global economic slowdown—which may impact on demand for shipping—may cap TTA’s share price performance. Nonetheless, an expected QoQ core profit improvement in 1Q12 should help support the share price. Moreover, the investment in the coal business and expansion of the infrastructure operation should make for long-term value accretion. Valuation-wise, the stock is currently heavily discounted—a YE12 PBV of 0.4x, (1.0SD below its long-term mean of 1.1x).
Dry bulk shipping market to remain vulnerable, but … Management maintains a bearish view with regard to the dry bulk shipping market next year, as new capacity additions look set to outpace demand growth. Demand for dry bulk shipping is expected to grow by about 7-8% in 2012, while the supply of dry bulk ships is forecast to expand by 10% during the same period. In addition, total confirmed orders for dry bulk vessels due to be delivered during 2011-13+ equal 36% of the current world fleet, while demand might weaken as a result of the global economic slowdown. Thus, low freight rates might persist through 2013. However, the firm’s lower OPEX, brought about by the younger average age of its fleet, should help it endure the low freight rate environment.
…better outlook for sub-sea service business should help support earnings: Management is now more optimistic about the offshore service market—both sub-sea service vessels and drilling. The demand-supply nexus of the offshore service market is expected to be tighter in 2012 and the outlook for 2013 is bullish, as fleet growth is forecast to lag demand additions. As such, utilization rates and margins are expected to rise going forward. The better prospects for the offshore service business should, therefore, help mitigate the effect of expected weak earnings at the shipping operation.

Expect earnings improvement in 1Q12: TTA's 1Q12 (Oct-Dec) earnings are expected to improve slightly QoQ, driven by high seasonal demand for shipping. Meanwhile, Mermaid Maritime’s (MM) (offshore service) profit contribution should soften QoQ, as peak seasonal demand has passed. However, MM’s earnings contribution should rise YoY, driven by increased utilization rates brought about by a demand recovery. UMS is expected to contribute a loss in 1Q12, due to logistics constraints caused by the flooding in Ayudhya Province in October. Nonetheless, the plant in Ayudhya is now up and running. The facility will continue to ramp up capacity, offsetting the production loss at the Samut Sakon plant (because of protests related to environmental issues). In addition, new dry bulk ships due to be delivered in March 2012 and June 2012 should boost earnings in FY12. Also note that the fertilizer (Baconco) and warehouse businesses are expected to post strong and relatively stable earnings in FY12.