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Thai Union Frozen Product

Survived last year's storms, better this year BUY

Thai Union Frozen Product Plc (TUF)

- Favored by low tuna price, expects higher margin in 2014

- Downstream shrimp business better than integrated

- Maintain Buy, raise 2014 forecast and TP to Bt80 from Bt75


2014 is being favored by a fall in tuna prices and we expect TUF's tuna business to do well this year, with overall gross margin improving to 15percent from 12% in 2013. We estimate average tuna price for 2014 to fall to US$1,500/ton from US$1,956 in 2013; it is now at US$1,225, a fall of 44% YoY. This bodes well for TUF since it widens margin on products carrying its own brand, now contributing 55% of revenue with gross margin at 70%. The flip side is that OEM products (45% of revenue, 30% gross margin) will have to be priced down. TUF says the low prices have encouraged customers to place larger orders. Though weather factors (La Nina and El Nino) will lead to volatile tuna prices this year, it should not be a major concern given the extent prices have already fallen.

La Nina and El Nino should be positive or neutral for TUF. These two phenomena cause ocean surface temperatures to deviate from the norm for three months. La Nina causes colder water in the equatorial area, facilitating the growth of cold water fish (including tuna), and leads them to move to shallower water. El Nino has the opposite effect, raising the equatorial ocean temperature, and resulting in stunted growth and mass migration for cold water fishes. La Nina will take place in the Eastern Pacific Ocean and El Nino in Western Pacific Ocean. However, for TUF, the effect is the same - both should make it easier to catch tuna.

Downstream shrimp business a bonus during EMS. TUF is active in the shrimp business - but is not integrated as is CPF, which has its fingers in all pies, from shrimp farms to packing and trading. TUF, on the other hand is involved primarily in packing and trading shrimp as a commodity. The possession of Packfood Plc, a packer, and Chicken of the Sea, a well-known US brand, means that even though there is as yet no real cure for EMS and domestic shrimp supply is only just creeping back, TUF benefits from high shrimp prices in its trading business and its packing business is free to source shrimp from anywhere in the world to get the best price.

Good year ahead: raise 2014F and TP to Bt80 from Bt75; maintain BUY. This should be a good year for TUF, with three positives: 1) baht depreciation, 2) lower tuna prices that should lift demand, and 3) continued recovery of Thailand's shrimp business. TUF has set a sales target of US$4bn for 2014, +10%YoY in US$ terms and +17% in baht terms, on a new assumption of Bt33/US$ from last year's average of Bt31/US$. We expect the company to have no trouble achieving target in the climate of a depreciating baht and lower tuna prices. TUF feels that the lower tuna prices will encourage customers to launch promotional campaigns to increase sales volume, leading to higher orders from TUF. TUF also expects a significant turnaround in its shrimp business. We maintain BUY and raise target price to Bt80 from Bt75, based on 2x 2014 P/BV (same method as for CPF), switching from 2014 PER of 16x.


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