Thoresen Thai Agencies

Thoresen Thai Agencies Plc (TTA) 

Investment thesis

The key messages at the analyst meeting yesterday dampened our optimistic view of the dry bulk shipping market outlook and raised concerns about Mermaid Maritime’s (MM) offshore service business prospects amid low-oil-price-driven weaker demand. In our view, TTA’s weaker operational outlook may put downward pressure on the share price. But, the stock trades at a YE15 PBV of only 0.6x, 0.5SD below its long-term average of 0.8x, which should limit share price downside risk. We retain our HOLD rating on the stock.  

Expect 1Q15 core earnings to weaken, to rebound in 2Q15   

The Baltic Dry Index’s (BDI) year-to-date average has slumped 55% YoY and 44% QoQ to 623 points due to low seasonal demand for dry bulk shipping. Moreover, we expect the earnings contribution from MM to decline YoY and QoQ on low seasonality for the subsea service business and the early termination in Dec 2014 of a contract for use of its MTR-2 tender rig. As such, we expect TTA’s core earnings to weaken both YoY and QoQ in 1Q15. However, the dry bulk shipping market is expected to resume its high season in 2Q15, driven by the South American grain-trading season. The subsea service business will also resume its high season in 2Q15. TTA’s core earnings are therefore expected to rebound QoQ in 2Q15. 

Less favorable dry bulk shipping market outlook 

The dry bulk shipping market outlook is less favorable than we had envisaged, due to weaker global demand on the back of a global economic slowdown, particularly in China. Major shipping consultancies, Drewry and Marsoft, both revised down demand growth to 4.2% in 2015 from 5.2%. Meanwhile, dry bulk fleet growth is forecast at 5.0%, a slight decrease from 5.1%. Given that, freight rates may still be under pressure this year. However, demand growth of 5.2% is expected to outpace the supply growth of 4.5% in 2016. This should bode well for freight rate recovery next year. 

Low-oil-price environment pressures offshore service business       

TTA’s offshore business arm, MM, serves mostly E&P clients in the oil production phase, but its business has been negatively impacted from the low-oil-price environment because of weaker demand for subsea services. In addition, we think that the low-oil-price environment could limit opportunities for the company to find new contracts for its MTR-2 rig (which is already 34 years old).

New investment projects under study    

Apart from the firm’s interest in purchasing an 11.97% stake in BCP from PTT (the final investment decision depends on the terms and conditions agreed between the seller and the buyer), TTA is carrying out feasibility studies on new investment projects particularly related to the energy and consumer sectors. Management’s guidance was that it expects some of these projects to be concluded in 2015.