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Thoresen Thai Agencies

Better growth prospects, but no obvious short-term catalysts

Thoresen Thai Agencies

Investment thesis

The key messages at the analyst meeting reaffirmed our view of TTA's growth prospects. Expectations of weaker QoQ core numbers in the Jan-March quarter may weigh down stock sentiment in the short-term, but upcoming high seasonal demand in April together with the improved outlooks for the dry bulk shipping market and Mermaid Maritime in 2014 will later push up the share price, we believe. The stock currently trades at an end-Sept 2014 PBV of 0.6x, 0.5SD below its long-term mean and a deep discount to the Asian average of 1.0x. Share price downside risk appears limited.

2Q14 core earnings to soften QoQ, but improve strongly YoY

TTA's 2Q14 (Jan-March 2014) core earnings are expected soften QoQ, due to: 1) lower freight rates and 2) a smaller contribution from the offshore service business. The average QTD BDI has dived 28% QoQ (but is up 67% YoY) to 1,327 points, led by the Capesize (down 39% QoQ) and Supramax (down 19% QoQ) indices, as we are in a period of low seasonal demand. However, we expect the firm's core earnings to improve significantly YoY, led by higher YoY freight rates, a greater number of operating vessels and increased equity income.

Favorable outlook for dry bulk shipping & offshore service markets

Management shares our belief that the dry bulk shipping market will enter an up-cycle in 2014, driven by an improved demand-supply balance. Demand for dry bulk shipping is forecast to expand 7.5% in 2014, while supply is projected to grow only 4.5%, implying a supply deficit of 3%. As such, freight rates should rise. The favorable outlook bodes well for TTA's shipping business.

The offshore service business should continue to enjoy a cyclical upturn this year, fueled by strong demand in the face of supply tightness. As such, day rates should continue to rise. Hence, the earnings contribution from Mermaid Maritime (TTA holds 57%) should increase going forward, driven by higher utilization and day rates for existing assets and a full operational year for three new jack-up rigs (AOD I, II and III).

Scope for earnings upside

TTA will continue to expand its fleet (from 20 vessels currently) this year. Assuming that the firm successfully raises Bt4.2bn in capital via an RO and uses Bt4.2bn in debt financing, it should be able to buy 10 second-hand vessels. Our sensitivity analysis suggests that every additional vessel would boost TTA's FY14 net profit by 4percent from our current forecast.

Moreover, the upcoming listing of PM Thoresen Asia Holdings Plc (PMTA, the holding company of Baconco) on the SET in 2H14 should make for a substantial extra gain—TTA will divest 27.3m shares into the IPO. Assuming that the IPO price is pegged to a PER of 11x (a 15% discount to regional average of the Petrochemical sector), we preliminarily estimate that the firm would book a Bt425m (Bt0.37/share) extra gain.

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