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Thai Union Frozen Product

Baht deprecation burnishes earnings BUY

Thai Union Frozen Product Plc (TUF)

Giving thanks for baht weakness. TUF's earnings are being given a boost by the

depreciation of the baht in 4Q13. We had used an exchange rate for 2013 and 2014 of

Bt30.5/US$ in our forecast and calculated that each Bt1 deprecation of the baht adds

4.7% to TUF core profit. Thus, when adjusting foreign exchange to Bt31/US$ in 2013

and Bt32/US$ in 2014 from Bt30.5/US$ for both years, there is a large gain. In 2014 we

estimate this will raise EPS to Bt4.40 from our original forecast of Bt4.10.

Tuna, ~49% of revenues in 3Q13. TUF's tuna business is also doing well, with a high

gross margin which management says came from the drop in tuna prices created by

oversupply when some tuna markets faced problems: financial in Europe and currency

volatility in the Middle East. Gross margin for MW Brands in 3Q13 rose to 19percent from 18%

in 2Q13 and 14% in 1Q13 and for OEM to 9percent from 7% in 2Q13 and 6% in 1Q13. This lifted

average tuna gross margin to 14% in 3Q13 from 11.5% in 1H13. The outlook for tuna

should continue bright into 2014 with fish prices stable at a reasonable level that will

entice customers to increase orders.

TUF better than peers in shrimp, ~24% of revenues in 3Q13: The continuing Early

Mortality Syndrome (EMS) has clamped down on shrimp supply. Thai 2013 shrimp

production is estimated at 250,000 tons, halved from 550,000 tons in 2012, then

recovering slowly to reach 500,000 tons in 2016. In the shrimp industry, only TUF is not

burdened by large losses. TUF was able to report a much better net profit in 3Q13 than

expected, thanks to a significant turnaround in its shrimp business. TUF told analysts

at its 3Q13 analyst meeting that its shrimp business in Thailand remains poor, but its

US operations, under U.S. Seafood Trading Unit of Chicken of the Sea, imported shrimp

from other countries and book inventory stock gains. Shrimp prices have surged 80percent so

far this year and the stock gain from the lower prices made it possible for its shrimp

business to contribute 24% of total revenues. 3Q13 gross margin rose to 10percent from 6.5%

TUF is also the only one with higher shrimp production YoY. Shrimp price in October

was still high at Bt275/kg, but management believes prices may start to head down on

the low export season in 4Q13 and expected return in shrimp supply in early 2014.

Upgrade to BUY and lift target price to Bt70 from Bt60. 4Q13 looks to be better

than 3Q13 due to the gradual recovery of the shrimp business and the depreciation of

the baht. TUF's management believes the worst is over and is looking for a better core

profit in 2014 for several reasons, including the baht depreciation that will give a boost

to Thai exports. TUF should enjoy the greatest benefit of peers, with each Bt1/US$

depreciation estimated to increase net profit by 4.7%, compared to the 1-2percent for CPF

and GFPT. We upgrade TUF to Buy from Neutral and raise target price to Bt70, based

on industry average PER of 16x 2014. Total return is estimated at 9.3percent from upside to

target price plus dividend yield.

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