Thoresen Thai Agencies

Investment thesis

TTA’s purchase of an equity stake in Sino Grandness, a small Chinese food industry firm, is far outside the scope of its normal business, but we are optimistic over the deal, given Sino Grandness’s strong earnings growth profile and scope for upside from future expansion. Regardless, expectations of core earnings growth for TTA in 4Q14 together with 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).

Diversify into F&B business 

Yesterday, Soleado Holdings Pte Ltd (Soleado), a wholly-owned subsidiary of TTA, agreed to take a 9% stake in Sino Grandness Food Industry Group Ltd—a Chinese canned food and fruit beverage maker that is listed on the SGX—via a private placement of new shares. Soleado will subscribe to 60.6m new ordinary shares (representing 9% of the paid-up shares of Sino Grandness) at a price of SG$0.61 apiece. After the capita- raising, Soleado will be the second-largest shareholder in Sino Grandness and will be entitled to appoint one director to its board. The transaction is expected to be completed by YE14.

Sino Grandness’s core products are beverages branded “Garden Fresh” and canned vegetable and fruit products (see Figures 2 & 3). About 30% of its production is exported. 

Expect earnings accretion from the deal  

The Chinese company will post a strong earnings CAGR of 16%, 2014-16, according the Bloomberg consensus. As Soleado will hold 9% of Sino Grandness, we expect TTA to recognize dividend income in its consolidated financial statements. There is no historical dividend payment data, so we have conducted scenario analysis of the effect of different Sino Grandness payout ratios on dividend income to TTA. The analysis suggests that TTA’s FY15 earnings would increase by 2-12% from our base-case forecast if Sino Grandness set a dividend payout ratio ranging 10-50% of its consensus forecast FY15 net profit (Figure 4). 

Bargain acquisition price 

The investment cost will be about SG$37m (~Bt954m). Given its strong balance sheet with cash on-hand of Bt6.7bn and a net debt/equity ratio of 0.2x at end-June 2014, TTA should could finance the investment with internal cash. We think the price is a bargain, as it represents an 8% discount to the market price and implies an FY15 PER of 4x and a YE15 PBV of 1.3x, which are deep discounts to the regional F&B averages of 15x and 1.7x, respectively.