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Thai Union Frozen Products

Product prices back on track - 1Q14F: Expect net profit of Bt1.2bn, a good turnaround -.. But performance will be much better from 2Q14 on -Production cost cuts and more shrimp production lines to add to earnings -Maintain Buy with TP of Bt80; TUF is also our favorite food stock in 2Q14



1Q14 gross profit Bt4bn, gross margin 13.2% (vs. 12.9% in 4Q13). Sales are estimated at Bt30.3bn +24% YoY thanks to a healthier tuna business (-1% QoQ). Shrimp volume will be down YoY but better QoQ as the first quarter is the low season and also faced colder weather. We expect a FX gain of ~Bt110mn. All told, we estimate net profit of Bt1.2bn (+44%QoQ, +75%YoY), on a net margin of 3.9%. We expect greater improvement in 2Q14 and 3Q14, the traditional high season for food exports. Some extra expenses might occur in 1Q14 due to a restructuring of a shrimp production line.

2Q14 should be better, helped by a rebound of tuna prices, back up to US$1,225 per ton in April from bottom of US$1,175 per ton in March. We assume an average tuna price in 2014 of US$1,500/ton, down from US$1,956 in 2013; it is now at US$1,225, a fall of almost 50% YoY. This widens margin on branded products, supplying 25% of total revenue. On the other hand prices for OEM products (25% of total revenue), will have to be cut - but at the same time this does tend to encourage larger orders. Shrimp prices are signaling a turnaround, as seen by a fall in price of 4% MoM to Bt260/kg, the first decline after four months of no change at Bt270/kg. This indicates that more supply is entering the market, relieving the raw shrimp shortage. We expect much better earnings in 2Q14 and 3Q14 on high season for Thailand's shrimp exports and also after adjusting a production line utilizing synergy with subsidiary Packfood (PPC), which wound up in mid-1Q14.

Packfood cuts costs and increases products. After acquiring 100% of Packfood (PPC) in 2013, TUF will restructure its shrimp business. It began in 1Q14 by moving all shrimp processing into the same area as Packfood and closing existing lines. This will provide a material cut in cost of production and shrimp margins will come back up strongly in 2Q14 and onwards. Not only does this purchase cut costs, but also adds more product lines to its cooked shrimp, such as dim sum, sold under Packfood's brand "T-Time". We believe that once EMS is conquered, this deal will be value accretive.

TP Bt80, maintain BUY. TUF targets sales of US$4bn in 2014, +10%YoY in US$ terms and +17% in baht terms (Bt33/US$), growing to US$5bn in 2015, +25% YoY. It says it needs an M&A deal to reach this target in 2015, but is not looking at the manufacturing business as it does not need more factories. TUF's earnings should be back on track after a material turnaround in both tuna and shrimp businesses. We maintain BUY with target price of Bt80, based on 2x 2014 P/BV.


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