Thoresen Thai Agencies

Thoresen Thai Agencies Plc (TTA) 

 

Investment thesis

The key messages passed on at the analyst meeting yesterday reiterated our cautious view toward the dry bulk shipping market’s outlook, which is under a cloud of sluggish demand, and Mermaid Maritime’s (MM) offshore service business’ prospects amid low-oil-price-driven frailer demand. In our view, the weaker dry bulk shipping outlook and raised concerns about MM’s challenges may apply downward pressure on the share price. However, the stock currently trades at a YE16 PBV of only 0.4x, 1SD below its long-term average of 0.8x, which should limit share-price downside risk.

Earnings contraction expected for 4Q15 

The average BDI in 4Q15 to date has dropped 38% YoY and 29% QoQ to 690—led by a 43% YoY plunge in the Capesize index followed by a 37% YoY decrease in the Supramax index and a 30% YoY decline in the Handysize index, due to weak demand and thus the impact of high season has failed to happen. In addition, the fourth quarter is normally a low season for subsea service and fertilizer demand. Moreover, the impact of the agreed discount (a 10% QoQ lower jack-up rig day rate to US$162,000/day/ship) with AOD’s customers is expected to be reflected in 4Q15. As such, TTA’s 4Q15 core earnings are expected to decline both YoY and QoQ.

Dry bulk shipping to stay swamped; recovery expected from 2H16 

Oversupply in dry bulk shipping is expected to continue in 2016, but the situation is expected to improve from this year, which has seen extremely weak global demand, with China at the center. In 2015, the capacity growth of 2.7% is expected to outpace the demand growth of only 0.2%. However, dry bulk shipping is forecast to pick up in 2H16, driven by an improved demand-supply balance. The excess capacity is expected to narrow next year with a supply growth rate of 3.8% against demand growth of 3.1%. The freight rate is therefore expected to gradually increase from late 2016 onwards. In 2017, when demand growth is forecast to outweigh capacity growth, the year is expected to be the beginning of the next up-cycle for the dry bulk shipping market.

Low oil price = lower E&P activity, demand for offshore services    

The prolonged low oil price environment has resulted in a slowdown in Exploration and Production (E&P) activities globally. Given that, the order book for MM’s subsea service and drilling businesses has continued to decline over the past few quarters. Nonetheless, the expectation of an oil price recovery on the back of a declining supply surplus next year should revive E&P activities and thus demand for subsea and drilling services. We therefore expect the order book for MM’s upstream businesses, which will be under negotiations during 4Q15-1Q16, to increase going forward.