Thai Union Frozen Product

Shrimp business not bright but others still boost 2013 profit 24% YoY

Thai Union Frozen Product Plc (TUF)

4Q12 profit projected to drop 61% QoQ due to slow-down shrimp business

At the analyst meeting yesterday (8 November), TUF confirmed its sales TUF's

4Q12 net profit is projected at B627m or a significant shrinkage of 61% QoQ

(even worse than our earlier projection) due to the total sales that have

decelerated by 6.4% QoQ. For the gross profit margin, it would decline to 13.9%

which is the record low in 8 preceding quarters because mainly of the following

reasons. 1) The export season has passed, resulting in the company's

deceleration QoQ of sales. 2) There has been an epidemic in white shrimps,

reducing shrimp production into the local markets and urging the price to

increase rapidly in 4Q12 by 4.9% QoQ. This has also caused negative image for

TUF's businesses which are shrimp feed business (4% of total sales) and frozen

shrimp business (18% of total sales). 3) The tuna price has fluctuated, as the

average price in 4Q12 has dropped by 13% QoQ. Accordingly, the company has

to recognize the stock loss at the end of 2012. Nevertheless, the tuna price is

likely to improve in January 2013 by 9.2% MoM. We believe that the operating

result of tuna business would return to grow once again in 1Q13. Together with

the stock gain, there's nothing worrisome. Overall, TUF's 2012 net profit (before

extraordinary item) is projected to stand at B5.1bn, stabilizing close to the prior

year's level; however, it's still worse than our earlier projection by 15%.



After forecast revision, 2013 norm profit projected to grow 24% YoY

We revise down 2012-13 net profit forecast (before extraordinary item) by 15%

and 13% respectively to reflect the cost of raw materials (white shrimps) that

have increased after entrepreneurs have suffered damage from an epidemic in

white shrimps, resulting in some temporary absence of shrimp production in

Thailand. However, the government sector and entrepreneurs all have teamed

up to solve this problem by ceasing production of baby shrimps all at once for 2

months in order to get shrimps centers sanitized. Therefore, this epidemic should

recede in 2Q13, so it's only a short-term effect. After revising our forecast, 2013

net profit is projected to grow by 24% YoY due to the following reasons. 1) TUF's

businesses in the US have recovered (the subsidiaries Chicken of the Sea and US

Pet Nutrition) after loss in 2012. 2) The shrimp business (22% of total revenue)

would recover after 2Q13, so the raw material prices should decrease to normal.

3) The company's expenses would decline by 34% YoY due to debt repayment

before due date with B9.5bn from capital raising. This would strengthen TUF's

financial structure, also raising more opportunities for both new local and

international investment (projected to be made clesr within 2013).



Reiterate "BUY", believing share price substantially reflects negatives already

The new fair value, DCF (7.34% WACC), stands at B88 (from B94). The current

share price since the beginning of 2013 has slowed down continuously by 5.5%

against the SET that has increased by 7.7%, considered partially reflecting

abovementioned negative factors. In addition, there is 29% upside from the

current share price. We reiterate our recommendation of "BUY" for TUF.