Thoresen Thai Agencies

Investment thesis

The key messages at the analyst meeting yesterday reaffirmed our optimistic view over SGFI’s growth prospects and TTA’s 4Q14 core earnings growth outlook. Moreover, a better dry bulk shipping market outlook and good prospects for Mermaid Maritime next year should make for share price appreciation going forward. TTA currently trades at an end-Sept 2015 PBV of 0.9x, consistent with its long-term mean and the Asian average. We think the stock should re-rate further toward its earlier peak cycle multiple (a forward PBV of 1.3x, 1SD above its long-term average).

Scope for the earnings upside from SGFI  

Sino Grandness Food Industry Group Ltd (SGFI) plans to use the proceeds from TTA’s share subscription to expand its production facilities. SGFI formerly hired other companies to produce its products, but the firm has gradually built its own factories. In-house production will open scope for upside to SGFI’s long-term earnings profile from margin expansion—gross margin is expected to expand by 400-500 bps as a result of using its own facilities instead of outsourcing. Note that SGFI’s 1H14 gross margins from beverage products, domestic canned products, and export canned products were 42%, 40%, and 37%, respectively. 

There is plenty of room for SGFI’s beverage products to grow outside of China. According to Frost & Sullivan Analysis, the share of Asian specialty juice in the overall fruit and vegetable juice market is forecast to rise to 14.7% in 2017 from 14.1% in 2013. We anticipate new opportunities for SGPI to export beverage products to other Asian countries. 

Likely to recognize earnings from SGFI as equity income  

As TTA will be entitled to appoint one director to SGFI’s board, for which the accounting standard allows recognition of earnings as equity income, the firm is likely to book equity income from SGFI, although it will hold only 9%. The Bloomberg consensus forecasts that the Chinese company will post an FY15 net profit of RMB561m (Bt3,030m). We, therefore, expect TTA to book equity income of Bt218m in 2015, implying 18% upside to our FY15 net profit forecast of Bt1,177m. Our sensitivity analysis suggests that every 100 basis points increase in SGFI’s GM would boost equity income to TTA by 1%.

Strong 4Q14 core earnings expected   

Even though TTA’s mean freight rate in 4Q14 (July-Sept) is expected to soften QoQ (but rise YoY), we still expect its 4Q14 core profit to increase both YoY and QoQ, driven by more operating vessels and greater profit contributions from the offshore service business and from Baconco (TTA’s fertilizer and warehouse business in Vietnam). The firm’s total fleet is expected to expand to 49 vessels in 4Q14 from 31 in 4Q13 and 39 in 3Q14. The July-Sept quarter is also the peak season for the subsea business. Furthermore, Baconco is expected to post profit growth for 4Q14, fueled by greater sales volume and a fatter margin.