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Seafresh Industry

1Q14 earnings swing back strongly

Seafresh Industry Plc

Action and recommendation


- Earnings turnaround as expected; Outperform rating maintained. The

rebound in CFRESH's 1Q14 earnings to positive territory confirms our view of the

turnaround story in the shrimp business. In addition, the contraction in shrimp

prices since April 2014 and the arrival of the shrimp crop season in May to July will

add more excitement to CFRESH's earnings outlook and the attractiveness of the

stock. We maintain our Outperform rating on the stock with a 2014 fair value of

Bt12.80.

Key investment points

- Impressive 1Q14 earnings. In 1Q14, CFRESH reported its first net profit

following 4 consecutive quarters of loss. The 1Q14 net profit came in at Bt108mn,

turning from net losses in 4Q13 and 1Q13 of Bt63mn and Bt22mn, respectively. A

margin expansion driven by stable raw material prices and product price increases

was the key factor behind the strong improvement. Although an unexpectedly high

FX gain swelled earnings, the 1Q14 result was still strong after this item was

excluded.

- Volume and price boosted revenue YoY. 1Q14 total revenue was reported at

Bt1,788mn, up 32% YoY but down 18% QoQ. The YoY increase was due to

improvements in both sales volume and selling prices, in line with the uptrend in

raw material prices. However, the slowdown QoQ was due to seasonal factors.

- Gross margin back on track. Clearly, the main driver of CRESH's impressive

recent performance was the recovery in profitability following a raw material price

crisis that had hurt its margin for a year. 1Q14 GPM improved to 12.3percent from 7.7%

in 1Q13 and 0.3% in 4Q13, thanks to the stabilization of raw material prices

coupled with product price increases.

- Slight improvement in associated company performance. Income from

associated companies in 1Q14 also turned to the black at a positive Bt3mn from

losses in 1Q13 and 4Q13 of Bt21mn and Bt10mn, respectively, signaling a return to

breakeven point of its associated company, Belize Aquaculture.

- Large FX gain added more excitement to earnings. CFRESH reported a FX

gain of Bt35mn in this quarter. Excluding this item, core net profit was still

attractive at Bt73mn from core losses in 1Q13 and 4Q13 of Bt22mn and Bt63mn,

respectively.

- On the road to recovery. 1Q14's strong results were in line with our view on

CFRESH's turnaround story despite the huge unrealized FX gain of Bt88mn, which

we believe was booked as revenue (Bt53mn) and other income (Bt35mn).

Excluding this uncertain item, 1Q14 adjusted GPM still improved nicely to 9.6%

from below 5.0% in the previous 4 quarters. More clarification from management

on the unexpectedly high FX gain is required in order to identify the impact of this

item on the company's earnings outlook.


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