Thoresen Thai Agencies

Thoresen Thai Agencies Plc (TTA)

Investment thesis: At the analyst meeting yesterday, TTA reaffirmed the good prospects for its offshore service business, but the outlook for the dry bulk shipping market remains subdued. We think the dry bulk shipping market’s weak dynamics will limit TTA’s stock price performance. But an expected bottom-line improvement in 2H12 will help support the share price. Moreover, the coal business and expansion of the offshore and infrastructure operations should build long-term value.  The stock is deeply discounted—a YE12 PBV of 0.4x, (1.5SDs below its long-term mean of 1.1x).
Recovery expected in 2H12: We expect better numbers for 2H12, driven by high season for the sub-sea service business, the full utilization of MTR-2 (its contract was extended for another six months, May-Nov 2012) and the deployment of MTR-1 as an accommodation barge, starting May 2012 (150-day contract). Moreover, dry bulk shipping high season runs April-May, which should support the 3Q12 bottom-line. Also, high seasonal demand for fertilizer (Baconco) should be another 3Q12 earnings driver. But low season for dry bulk shipping resumes in July, so TTA’s shipping business will be squeezed again.
Good prospects for offshore service business: While the dynamics of the dry bulk shipping market remain weak, due to vessel oversupply (freight rates are likely to remain low for the next few years), the offshore service business has continued to improve, driven by strong demand because of a high oil price environment. The outlook for subsea services in 2013 is positive—global demand growth is forecast to outpace fleet expansion. Moreover, the utilization rates and day rates of oil rigs are rising, driven by higher global demand.
Note that TTA will take delivery of two new vessels (Aug 2012 and 2Q13), so its fleet will rise to 17 ships from 15 currently. There is also scope for earnings upside from the delivery of three rigs to AOD (Mermaid holds a 33.75% stake in AOD) in 2013 and second-hand dry bulk fleet expansion.
Mixed outlook for infrastructure business: UMS is expected to contribute losses for another 2-3 quarters, due to the extra logistics costs incurred as a result of the suspension of the Samut Sakorn plant because of environmental issues. In contrast, Baconco (the fertilizer and warehouse business) should continue to generate stable income streams.