Thai Union Frozen Products

Sustained high tuna price in Jan

Thai Union Frozen Products Plc (TUF)

Investment thesis

We still have a BUY rating on TUF, but within Food space we are currently more bullish about the scope for share price upside for CPF and GFPT, premised on anticipation of strong earnings recoveries for the two firms this year. Nevertheless, TUF's FY13 bottom-line profile is good and its forward PER is fairly cheap at 11.3x. There is also scope for profit upside from its US pet food unit and synergy-building with Pakfoods.

Sustained high tuna prices in Jan.

The average price of West Pacific Ocean (WPO) skipjack tuna stood at US$2,075/tonne in Jan 2013, up by 2% YoY and 9% MoM (against $1,900/tonne in Dec 2012). The record was $2,350/tonne in Sept 2012. The mean price in Jan declined by 12percent from the record.

Tuna margin secured with full cost pass-through

Raw tuna prices softened in 4Q12, which is high-catch season, but the Jan 2013 mean price reaffirms our view that high tuna prices will prevail through 2013. Supplies are tight as a result of unfavorable weather conditions and the temporary closures of several Pacific Ocean fishing grounds. Price retreats during high-catch periods will be modest and of short duration. We estimate a US$2,000-$2,500/tonne mean raw tuna price range this year. TUF has so far demonstrated an ability to pass through higher raw tuna prices to clients, so has secured its tuna margin in the 18-20% range for FY13 (assuming an improved COSI operation).

The new record raw shrimp price in Jan.

The 60 counts/kg shrimp price rose to Bt165/kg on Feb 1, 2013, up 50percent from a low of Bt110/kg in April 2012 and up 10percent from Bt150/kg during early Jan 2013. It touched a record of Bt180/kg during late Jan 2013. The YTD mean is Bt165/kg. The rising shrimp price environment is due to outbreaks of Early Mortality Syndrome (EMS) disease among shrimp farms in late 3Q12; the situation worsened in 4Q12. We don't expect production or shrimp prices to resume normal levels till about mid-year.

Lower shrimp sales volume and margin, 4Q12-1H13

High shrimp prices look set to prevail at least through 1Q13 and we expect volatility through 1H13. We don't think TUF will be able to fully pass through higher prices to its clients. Furthermore, it is likely to have problems sourcing shrimp supplies, given that EMS has decimated farming populations. As such, shrimp and feed sales volumes might diminish during 4Q12-1H13. We assume a recovery in 2H13.