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Thai Union Frozen Product

M&A deal to boost profit BUY

Thai Union Frozen Product Plc (TUF)

- 1Q14 net profit grows as expected

1Q14 net profit was reported at B950m, growing 16.5%qoq and

40.8%yoy (as expected); B350m extraordinary expense from

provision of inventory impairment recognized in 4Q13 was not

booked in 1Q14, and B254m Fx gain was included.

Excluding extraordinary items, 1Q14 normalized profit stayed close

to 4Q13. Sales volume was B28bn, falling 9.2%qoq, slightly lower

than the peak at B31bn in 4Q13 as a result of seasonal effect.

Shrimp processing business has stopped its production in January to

improve its food packaging assembly line. SG&A/Sales increased

from 9.3% in 4Q13 to 9.7% in 1Q14, totally negating a rebound in

gross margin. 1Q14 marketing cost was higher than usual, mainly

from COTS’s campaign of Chicken of the Sea’s 100th anniversary,

celebrating COTS’s superiority in U.S. canned and frozen seafood

market. 1Q14 net profit made up 18% of FY2014 earnings forecast.

- Looking for M&A deal

After the analyst meeting, we still have a positive outlook on TUF in

2014. We project FY2014 net profit to grow by 83%yoy; expecting

sales volume at US$4bn and gross margin at 14.9%, in line with

TUF’s target. Tuna business is likely to grow further; low material

cost would raise worldwide tuna consumption. Pet food business has

grown nicely since because U.S. Pet Nutrition has expanded its

business (trading business, in addition to contract manufacturing

business). Shrimp business would be affected by a delayed

rebound; EMS has not receded completely, so the amount of shrimp

from Thailand sold in the market would not grow as rapidly as

expected. However, TUF’s weak shrimp business would be

compensated by another two strong businesses. As TUF’s earnings

result has returned to normal and the financial position has become

stable with D/E ratio of 0.8x, TUF might benefit from M&A deal; the

conclusion on M&A deal would be made around 2014-2015.

- Agribusiness-food sector’s top pick

We reiterate to buy. FY2014 fair value (DCF, 7.34% WACC) of B76

implies 14% upside. FY2014 average dividend yield is 3.3%p.a (paid

twice a year).

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