Thoresen Thai Agencies

Q1 2013 core loss in line with model; a weaker quarter ahead

Thoresen Thai Agencies Plc (TTA)

Core profit above estimate

TTA posted a 1Q13 (Oct-Dec) net loss of Bt138m, shallower than the 1Q12 net loss of Bt560m and the 4Q12 net loss of Bt1,502m. Stripping out Bt10m in impairments and write-offs, a Bt55m gain on sales of an investment and assets and an FX gain of Bt10m, the 1Q13 core loss would be Bt194m, shallower than the core loss of Bt208m in 1Q12, but a reversal from core earnings of Bt46m in 4Q12. The core loss was in line with our estimate.

Results highlights

The key factors behind the YoY improvement in the core number were: 1) greater YoY earnings at the offshore service business (fueled by higher day rates for subsea service vessels and the renting of the MTR-1 rig as an accommodation barge), 2) better profits at UMS and Baconco (the GPM of UMS rose to 24% in 1Q13 from 15% in 1Q12, while the GPM of Baconco increased to 15% in 1Q13 from 9% in 1Q12), 3) lower SG&A expenses (the SG&A/sales ratio fell to 12.1percent from 21.2% in 1Q12) and 4) lower interest expenses (down 66% YoY).

The deeper QoQ loss was due mainly to a weaker shipping unit operating performance. The freight rate dived 27% QoQ (and 32% YoY) to US$7,540/day/ship, while the number of operating vessels fell to 17 ships from 24 in 4Q12.

Outlook

We expect TTA's 2Q13 (Jan-March) core loss to deepen both YoY and QoQ. The driver will be smaller earnings for the offshore service business, as the MTR-2 rig will remain shut down for maintenance for the entire quarter. However, contract renewal for MTR-1 (as an accommodation barge) in Feb 2013 should mitigate the effect of no income for MTR-2. The operating performance of the shipping business is expected to improve QoQ, led by seasonally higher demand and higher freight rates. In addition, a new ship was delivered in Nov and some vessels are being relocated to exploit higher transatlantic freight rates, which should boost the top-line.

What's changed?

We have slashed our FY13 forecast to net loss of Bt278m from a net profit of Bt198m, which factors in: 1) a 10% lower freight rate assumption to US$8,798/day/ship and 2) higher expected tax expenses. As such, our YE13 target price falls to Bt16 from Bt16.20, pegged to a PBV of 0.5x (0.75SD below TTA's long-term mean). We expect a consensus forecast downgrade soon.

Recommendation

We think the dry bulk shipping market's bearish outlook together with anticipation of further bottom-line weakness in 2Q13 will limit TTA's stock price performance. However, expansion of the offshore and infrastructure operations should build long-term value. The stock is currently heavily discounted—a YE13 PBV of 0.5x, (0.7SD below its long-term mean).