Thoresen Thai Agencies

Thoresen Thai Agencies Plc (TTA)

Below expectations: TTA posted a 3Q12 (April-June) net loss of Bt2,351m, a reversal from a net profit of Bt297m in 3Q11, but deeper than the 2Q12 net loss of Bt205m. Stripping out a Bt2,319m impairment on its investment in UMS and extra gains totaling Bt45m, the 3Q12 core loss would be Bt77m, shallower than the core losses of Bt281m in 3Q11 and Bt251m in 2Q12. The core loss was also shallower than our forecast and the consensus estimate of around Bt100m.
Results highlights: The key factors behind the smaller core loss were: 1) fatter YoY shipping GPM (5% against 2% in 3Q11 and 3% in 2Q12), due to cost-cutting, 2) higher QoQ freight rates (up 4% QoQ but down 19% YoY to US$9,912/day/ship), 3) more ships in operation (21 versus 16 in 2Q12), 4) greater earnings from the offshore service business (the subsea service vessel utilization rate rose tof 78%, up from 76% in 3Q11 and 59% in 2Q12), 5) a bigger earnings contribution from the fertilizer business (Baconco) and 6) lower SG&A expenses (the SG&A/sales ratio fell to 14.6% from 16.6% in 3Q11 and 15.8% in 2Q12.
However, UMS posted a deeper loss for 3Q12, due to higher logistic costs, as the operation at Samut Sakorn was suspended because of environmental issues.
Outlook: We expect TTA’s 4Q12 core earnings to be flattish QoQ but better YoY. The offshore service business will be the key earnings driver, due to high seasonal demand and a full quarter of deployment of MTR-1 as an accommodation barge. The bigger earnings contribution from the offshore service business should mitigate the effect of weaker shipping income because of low seasonal demand for dry bulk shipping. In addition, fleet relocation to exploit higher transatlantic freight rates could boost the top-line.
What’s changed? We have revised our FY12 net loss forecast deeper to Bt3,201m (from Bt77m) to reflect: 1) the impairments booked in 3Q12 and 2) lower GPM assumptions for the shipping business and UMS. As such, our YE12 target price falls to Bt18.50 from Bt21, pegged to a YE12 PBV of 0.5x (0.7SD below TTA’s long-term mean of 1.1x). 
Recommendation: We think the dry bulk shipping market’s bearish outlook will limit TTA’s stock price performance. But an expected bottom-line improvement in 4Q12 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 currently heavily discounted—a YE12 PBV of 0.4x, (1SDs below its long-term mean).