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Thai Union Frozen Products

Shrimp and OEM business recoveries on-track

Thai Union Frozen Products Plc (TUF)

Investment thesis

TUF's preview meeting confirmed our confidence in its Thai processed shrimp and OEM tuna businesses recovering during FY14 on lower domestic shrimp prices and gradual raw tuna price increases. Moreover, we expect COSI's profit to rise and USPN to break even this year. The current low tuna price will boost OEM tuna sales volume (thanks to client re-stocking), which will outweigh the effect of possible OEM margin squeeze caused by losses on buffer stocks. Our TRADING BUY rating stands with a new PEG-based YE14 target price rises to Bt73 (from Bt68).

Healthy core earnings growth expected for 4Q13

We estimate a Bt950m net profit for 4Q13, up 55% YoY but down 5% QoQ. Stripping out extra items—a Bt150m FX loss and a Bt100m insurance payout for business interruption—core earnings would be Bt1bn, up by 65% YoY and 11% QoQ. The assumed YoY core profit growth is due to recoveries in the processed shrimp operation, a fatter OEM tuna margin, an improved COSI bottom-line and a bigger tax credit (tied to the burning off of retained losses at USPN). The expected QoQ core earnings rise was driven by the QoQ reversal of a tax expense into a tax credit.

As USPN has restructured, scrapping unprofitable product lines, we expect it to book a Bt380m inventory write-down to 4Q13. Hence, we model TUF's 4Q13 GM at 12.9% against 13.9% in 3Q13 (11.6% in 4Q12). Excluding the inventory write-down, GM would have fattened QoQ to 14.2% in 4Q13, led by fatter margins for branded tuna and processed shrimp and a bigger COSI profit. We model for 4Q13 sales of US$950m, up by 10% YoY and 2% QoQ.

Raw tuna price fell again in Jan, boosting OEM sales volume

The mean price of West Pacific Ocean (WPO) skipjack tuna in January 2014 was US$1,275/tonne, down by 39% YoY and 9% MoM, its lowest level since Dec 2010. We attribute the sharp fall to excess tuna supply as a result of colder-than-usual Northern Hemisphere weather. TUF stands to benefit from the current low tuna price—greater sales volume should outweigh the effect of margin squeeze from a possible loss on buffer stocks. We expect OEM sales volume to jump in 1Q14 and a fatter mean YoY OEM tuna margin for FY14, driven by a gradual tuna price recovery.

FY14 earnings forecast and YE14 target price upgrades

We have increased our FY14 net profit forecast by 5% to Bt5.1bn to factor in a lower tax expense assumption.






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