The Nation



Thai Union Frozen Products

Better growth prospects, but no obvious short-term catalysts An FY14 earnings recovery play

Thai Union Frozen Products

Investment thesis

Following the analyst meeting, we remain fully confident that TUF's FY14 earnings will jump, led by GM recoveries for both the export shrimp and the OEM tuna businesses and a turnaround at USPN in 2H14. Our TRADING BUY rating stands with a YE14 target price of Bt73.

4Q13 results recap—core profit undershot model by 44%

TUF posted an Bt815m net profit for 4Q13, up 33% YoY but down 19% QoQ. Stripping out three extra items in 4Q13—a Bt150m FX loss, a Bt327m accounting gain for a subsidiary and a Bt73m insurance payout for business interruption—core profit would be Bt565m, down by 7% YoY and 37% QoQ. Note that we treated the inventory write-offs at MWB (Bt143m) and at USPN (Bt206m) as impacting GM. If we were to strip out the inventory write-offs, adjusted core profit would be Bt914m, up by 51% YoY and 1% QoQ.

Net profit was 14% below our model, due to lower extra gains than assumed. Core earnings undershot our estimate by 44%—SG&A and interest expenses were considerably heavier than expected, while the tax credit was smaller than anticipated. GM was in line with our model. The modest YoY core profit decline was led by jumps in interest and SG&A expenses and a lower tax credit. The QoQ dive was due to jumps in SG&A and interest expenses. GM was 12.9% in 4Q13 (11.6% in 4Q12 and 13.9% in 3Q13). Excluding inventory write-offs, normalized GM would be 14.8%, up both YoY and QoQ.

Greater OEM tuna volume and a shallower USPN loss in FY14

We expect OEM tuna sales volume to expand, as retailers should stock and sell more tuna products, given low prevailing raw tuna prices. Raw tuna prices appear to be near bottom, so we expect them to rise as the year progresses. The GM of the OEM tuna business should incrementally fatten on greater sales volume and a gradual tuna price uptrend. Meanwhile, the GM of the branded tuna business will expand on the low tuna pricing environment. We expect USPN to post a shallower QoQ loss for 1Q14 and break even in 2Q14 or 3Q14.

Improved shrimp margin on continued sales price increases

The shrimp industry recovery has been painfully slow, but we forecast that output will rise by about 20% this year. So, the GM of TUF's frozen shrimp-for-export operation should expand on higher sales prices for new orders.

For FY14, we model for total sales of US$3.98bn, up 8% YoY, and GM of 14.2% (close to TUF's guidance of $4bn and GM of at least 14%).

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