Thai Union Frozen Products

Weak Q4 2012 earnings expected

Thai Union Frozen Products Plc (TUF)

Investment thesis

Diminished expectations for 4Q12 numbers, shrimp margin squeeze and a lower 1H13 shrimp sales profile have prompted us to cut our FY12-13 profit forecasts and YE13 target price. Nevertheless, TUF's 1Q13 profit will recover QoQ, driven by its tuna business and its shrimp operation should bounce back in 2H13. Our BUY rating stands, premised on an FY13 earnings recovery and a cheap PER of 12.4x. There is also scope for bottom-line upside from TUF's pet food unit in the US and synergy-building with Pakfoods in FY13.

4Q12 earnings dive expected

We estimate a Bt600m net profit for 4Q12, down by 60% YoY and 63% QoQ. Excluding extra expenses and FX, a core earnings plunge of 42% YoY and 56% QoQ is expected. The profit dive is attributable to squeezed shrimp margin, a tuna stock loss and higher SG&A tied to a brand awareness campaign for Select Tuna. We model for a GM decline to 13.4percent from 16.6% in 4Q11 and 15.7% in 3Q12. The SG&A/sales ratio is assumed at 10% (9.3% in 4Q11 and 8.8% in 3Q12). The mean shrimp price in 4Q12 (60 counts/kg) was Bt147/kg, up by 2% YoY and 3% QoQ. The mean WPO skipjack tuna price was US$2,003/tonne, up 5% YoY but down 13% QoQ.

Squeezed shrimp margin and tuna stock loss in 4Q12

The rising shrimp price environment is due to an outbreak of Early Mortality Syndrome (EMS), which manifested in late 3Q12 and worsened in 4Q12. Because of substantial shrimp price volatility and lower shrimp prices in Indonesia and India than in Thailand in 4Q12, management said it couldn't pass through higher raw shrimp costs to its clients. Hence, shrimp GM would have been squeezed in 4Q12. Moreover, the QoQ tuna price drop in 4Q12 will make for a tuna stock loss for 1-2 months and a slimmer tuna margin for 4Q12. TUF typically carries 1.5-2 months of tuna inventory as a reserve.

1Q13 earnings to rebound QoQ on improved tuna margin

The shrimp operation will remain weak in 1Q13, due to tighter shrimp supplies (shrimp ponds are being cleaned in an effort to stamp out EMS) and a smaller shrimp sales volume. Shrimp margin and output will resume normal levels in 2H13. We expect tuna margin to improve in 1Q13 on a stock gain (due to a QoQ higher tuna price).

FY12-13 earnings forecast cuts; target price reduced

Our FY12 profit forecast dives 20% to Bt4.68bn to factor in squeezed shrimp margin and a tuna stock loss in 4Q12 and our FY13 projection falls 10% to Bt6.47bn in anticipation of persisting weak shrimp margin and lower sales volumes of shrimp products in 1H13. As such, our YE13 target price declines 10% to Bt85.