Thoresen Thai Agencies

Thoresen Thai Agencies Plc (TTA) 

 

Investment thesis

The key messages heard at the analyst meeting last Friday reiterated our cautious view toward the dry bulk shipping markets 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, TTA’s weaker operational outlook may apply downward pressure on the share price. But, there is scope for upside to the firm’s earnings forecast stemming from future M&As. Also, the stock currently 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. 

MM to drive QoQ earnings improvement for 2Q15 …  

Even though the dry bulk shipping market is expected to remain subdued throughout the year, due to weaker global demand amid new capacity additions—the supply growth of 3.2% is now expected to outpace the demand growth of 1.2% in 2015, we still expect TTA’s 2Q15 core operations to improve QoQ, driven by: 1) greater earnings contribution from MM on the back of the increased utilization rates of subsea vessels since they are back at sea after maintenance in 1Q15 and 2) bigger profit contribution from PMTA on high seasonal ASEAN demand for fertilizer. But, the firm’s 2Q15 core operations are expected to wane YoY, due to weaker freight rates and early termination of a contract in December for the use of its MTR-2 rig. 

… but oil price and extra capacity puts strain on offshore services 

The low-oil-price environment has continued to dampen demand for offshore services. Also, new capacity additions in the offshore service sector will also stifle utilization rates. Given that, day rates are expected to remain under pressure over the next few years. Even though TTA offshore business arm MM serves mostly E&P clients in the oil production phase in the Middle East and South-east Asian regions, in which spending cutbacks are unlikely, day rates are inevitably under pressure from the low oil price. 

Furthermore, this environment could limit opportunities for the company to find new contracts for its MTR-1 and MTR-2 rigs, which are more than 30 years old. In light of this, the firm plans to sell both rigs and already has prospective buyers secured. The transactions are expected to be completed in 2H15 and we expect TTA to book some gain from the sale of these rigs. 

M&As represent promising next step to reap growth    

After a period of investment for organic growth in shipping, energy, and infrastructure businesses during the past few years, TTA is exploring opportunities for future growth through M&As. It is negotiating with prospective targets, particularly related to the renewable energy (solar, wind, biomass) and consumer (F&B, consumer products) sectors. Management’s guidance was that it expected some of these projects to be concluded within the next six months.