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Thai Union Frozen Product

Better margin on lower tuna prices - Favored by low tuna price, margins improved - Production cost cuts and more shrimp production lines to add to earnings - 1Q14 core profit expected at Bt1.2bn - Maintain Buy with TP of Bt80

Thai Union Frozen Product Plc (TUF)

2014 looking better, helped by a fall in tuna prices and shrimp turnaround, leading to a widening in overall gross margin from last year's 11.6percent for tuna and 9.4percent for shrimp. Average 2014 tuna price is put at US$1,500/ton from US$1,956 in 2013; it is now at US$1,175, a fall of 49% YoY. This widens margin on branded products, at 25% of total revenues. On the other hand prices for OEM products (25% of total revenue), will have to be cut, but this does tend to encourage larger orders. The drop in tuna prices gives some breathing room after last year's high of US$2,300/ton in the same period.

Margins to improve. Tuna provides half of its revenue, and half of that comes from branded products and half from OEM. We expect gross margin to improve to 15% this year, with sales of its own brands enjoying a higher margin; though margin will slip on OEM products, volume should increase to provide an offset. Shrimp is still in a slump but will improve QoQ, providing a gross profit equal to 4Q13; we look for improvement in 2Q14, as it is the high season for export production.

Packfood cuts costs and increases products. After acquiring 100% of Packfood (PPC) in 2013, TUF will restructure its shrimp business, in 1Q14 moving all shrimp processing into the same area as Packfood and closing existing lines. This will provide a material cut in cost of production and shrimp margins will come back up strongly in 2Q14 and onwards. Not only does this purchase cut costs, but also adds more product lines to its cooked shrimp, such as dim sum, sold under Packfood's brand "T-Time". We believe that once EMS is conquered, this deal will be value accretive.

1Q14F: We expect sales of Bt30.3bn, -1% QoQ, but +24% YoY thanks to the healthier tuna business. Shrimp volume will be down YoY but improved QoQ. We expect gross profit of Bt4bn with a 13.2% gross margin (vs. 12.9% in 4Q13) and net profit of ~Bt1.2bn (+53%QoQ, +85%YoY), on a net margin of 4%. We expect to see even greater improvement in 2Q14 and 3Q14 as these are traditionally high season for food exports.

TP Bt80, maintain BUY. This should be a good year for TUF. It targets sales of US$4bn in 2014, +10%YoY in US$ terms and +17% in baht terms (Bt33/US$), growing to US$5bn in 2015, +25% YoY. It says it needs an M&A deal to reach this target in 2015, but is not looking at the manufacturing business as it does not need more factories. We feel that even if TUF lowers its prices on tuna products, it will benefit, as customers would then launch promotional campaigns to increase sales, leading to higher orders from TUF. TUF also expects a significant turnaround in its shrimp business. We maintain BUY with target price of Bt80, based on 2x 2014 P/BV (same method as for CPF).




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