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Thai Union Frozen Products

Risk of 4Q13 OEM tuna margin squeeze

Thai Union Frozen Products Plc (TUF)

Investment thesis

The tuna price drop in December has raised concerns over the risk of OEM tuna margin squeeze in 4Q13. However, we believe that it will constitute just a one-time hit; an OEM tuna margin recovery is expected in 1H14, led by higher tuna prices. TUF's shrimp operations should also recover gradually, 4Q13 through to 2Q14, led by lower shrimp prices. Our TRADING BUY rating stands.

Raw tuna prices declined further in December 2014

The mean price of West Pacific Ocean (WPO) skipjack tuna was US$1,400/tonne in Dec 2013, down by 26% YoY and 11% MoM ($1,570/tonne in Nov). December marked the third consecutive quarter of price drops—a 40% dive from the peak for WPO of $2,325/tonne in March. The price drop in Dec was an unexpected negative surprise.

We attribute the drop in raw tuna prices to greater tuna supplies related to: 1) colder-than-usual weather (fish tend to swim near the surface during cold weather, making them easier to catch) and 2) the end of the July-Oct ban on the use of Fish Aggregating Devices. The 2013 mean price was US$1,956/tonne (down 8% YoY). The 4Q13 mean price was $1,580/tonne (down by 21% YoY and 15% QoQ)

OEM tuna margin to remain under pressure in 4Q13

We assume that clients started re-stocking on tuna products at the Dec 2013 price, which represented a three-year low. Although the price drop will have boosted OEM tuna sales volume, we believe it would also have squeezed OEM tuna margin in 4Q13, as raw tuna would have been bought at higher prices in Oct-Nov. We estimate that OEM tuna GM will post a retreat to 6-7% in 4Q13 from 9.1% in 3Q13 and 7.8% in 4Q12.

However, branded tuna margin should have fattened, thanks to lower raw tuna costs and sales prices that were locked in by 1- to 3-month forward contracts. We expect branded tuna GM to post a rise to 19-20% in 4Q13 from 18.9% in 3Q13 and 12.7% in 4Q12.

Slight declines in shrimp prices, Nov 2013 through Jan 2014

The 60 counts/kg domestic shrimp price was Bt270/kg as of January 7, down 4percent from the October 2013 peak of Bt280/kg. The slight decline in the benchmark domestic shrimp price suggests that shrimp supply bottomed out in October. In anticipation of gradual growth in industry-wide shrimp output from 4Q13 through 2Q14, we expect TUF's OEM shrimp GM to fatten to 12% in 4Q13 from 10% in 3Q13 and 9% in 4Q12.

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