Thoresen Thai Agencies

Thoresen Thai Agencies Plc (TTA)

Core profit beat estimates
TTA posted a 1Q14 (Oct-Dec 2013) net profit of Bt250m, a turnaround from net losses for 1Q13 and 4Q13. Stripping out gains of Bt42m on FX and Bt4m on asset sales, core earnings would be Bt203m against a core loss in 1Q13 and up 61% QoQ. The core profit was somewhat above our estimate and the consensus, due to higher-than-expected equity income (from AOD) and lower-than-assumed SG&A expenses.
Results highlights
The core earnings improvement was led by: 1) a better shipping performance, 2) a greater profit contribution from the offshore service business, 3) a bigger contribution from Baconco and 4) lower SG&A expenses. The shipping business’s average freight rate rose by 39% YoY and 27% QoQ to US$10,446/day/ship, while the number of vessels rose to 33 from 29 in 1Q13 and 31 in 4Q13. In addition, the shipping business’s GM turned around to 8% from -9% in 1Q13 and 3% in 4Q13.
Mermaid Maritime posted a net profit of Bt238m, a turnaround from a net loss in 1Q13 and up 1,313% QoQ, driven by AOD revenues. In addition, Baconco’s net profit rose by 24% YoY to Bt88m, driven by a fatter GM (to 20% from 15% in 1Q13). However, UMS reported a net loss of 35m, a reversal from a net profit in 1Q13 (but the loss was shallower QoQ).
Outlook
The average QTD BDI has dived 27% QoQ to 1,354 points—led by the Capesize (down 38% QoQ) and Supramax (down 19% QoQ) indices, as we are in a period of low seasonal demand. Meanwhile, the Handysize Index has been stable QoQ. Note that in YoY terms the average QTD BDI is up 70% with rises across all vessel classes. The key factor behind the YoY rebound is an improved demand-supply balance. We, therefore, expect TTA’s 2Q14 (Jan-March 2014) core profit to soften QoQ on seasonality, but improve significantly YoY, driven by higher YoY freight rates, a greater number of operating vessels and increased equity income.   
What’s changed?
We have revised up our FY14 net profit forecast by 45% to Bt771m to fine-tune for the street-beating 1Q14 earnings. Our end-Sept 2014 target price rises to Bt22.20 (from Bt22), pegged to TTA’s long-term PBV of 0.9x.
Recommendation
Expectations of weaker QoQ core operational numbers in the Jan-March quarter may weigh down sentiment toward TTA in the short-term. But upcoming high seasonal demand in April together with a better dry bulk shipping market outlook and good prospects for Mermaid Maritime in 2014 will later boost the share price. The stock is currently heavily discounted—an end-Sept 2014 PBV of 0.6x, (0.5SD below its long-term mean) and a discount to the Asian average of 1.0x. Downside risk appears to be limited.