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Thoresen Thai Agencies

Offshore service business to lead earnings improvement in 2014

Thoresen Thai Agencies Plc (TTA)

Investment thesis

Even though we are optimistic about TTA's long-term growth prospects, we think the firm's ongoing capital-raising will dampen sentiment toward the stock in the near-term. Sentiment should improve again later, on expectations of an earnings recovery in 1Q14 (Oct-Dec) in tandem with high season and an improved dry bulk shipping market outlook for 2014. The stock is currently heavily discounted—an end-Sept 2014 PBV of 0.7x, (0.7SD below its long-term mean) and a discount to the regional average of 1.0x. Downside risk appears to be limited.

Offshore service business …a sweet spot

The offshore service business is expected to continue its cyclical upturn in 2014, fueled by strong demand in the face of supply tightness. E&P spending continues to increase, supported by sustained high crude prices and depletion of existing oil fields. The demand-supply balances for both tender and jack-up rigs remain tight, due to growing demand and aging fleets (about 50% of the global rig fleet is over 30 years old). The industry utilization rates of both tender and jack-up rigs are above 90% and are 100percent for new rigs. Demand for rigs is expected to outpace supply within the next 1.5 years. As such, day rates should sustain the current uptrend.

Given the bright prospects for the offshore service business, the earnings contribution from Mermaid Maritime (TTA's offshore business unit) is forecast to increase going forward, driven by higher utilization and day rates of existing assets and a full operational year for three new jack-up rigs (AOD I, II and III).

Dry bulk shipping market to gradual improve next year

The dry bulk shipping market appears to have bottomed out. It is expected to enter an up-cycle in 2014, driven by an improved demand-supply balance. Demand for dry bulk shipping is forecast to expand 6.2% in 2014, while supply is projected to grow only 4.8%, implying a supply deficit of 1.4%. Given expectations of a better demand-supply balance next year, freight rates should rise accordingly. Management conservatively forecasts that TTA's freight rates will increase 26% YoY to US$10,500/day/ship in 2014.

Further core improvement expected for 1Q14 (Oct-Dec)

TTA's core numbers should improve both YoY and QoQ in 1Q14, driven by high season for dry bulk shipping and a bigger contribution from the offshore service business, particularly the drilling unit. It is now high season for Supramax and Handysize vessels—the Supramax and the Handysize indices for Oct-Dec-to-date have risen by 40% QoQ and 26% QoQ, respectively. The spot Supramax freight rate of US$16,254/day/ship (which implies TTA's time charter rate at US$14,629) is far above the firm's break-even point of US$8,900/day/ship. Apart from anticipation of strong earnings contributions from established assets, we expect a bigger profit at the drilling unit, as the AOD III rig started operating in Oct.

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