Thai Union Frozen Products (TUF) stock rallied yesterday by nearly 7 per cent, strongly supported by positive views on its future earnings derived from lower costs and market synergy after its Bt28.5-billion acquisition of MW Brands, a leading European seafood firm.
Securities Analyst Association (SAA) consensus has predicted TUF's net profit at about Bt3.75 billion this year and Bt4.11 billion next year. These projections translate into estimated earnings per share of Bt4.25 this year and Bt4.58 next year. Many brokerages have given TUF stock a "buy" rating.
TUF rose yesterday by 6.95 per cent to close at Bt50 per share.
KGI Securities (Thailand) reiterated its recent upgrade of the stock now that the firm will become a true global player in the tuna market after the acquisition, as MW Brands (MWB) has a strong foothold in France, the UK, Italy, the Netherlands and Ireland.
TF won a bid to acquire a 100-per-cent stake in MWB at a total value of ?680 million (Bt28.5 billion).
After the acquisition, TUF's sales to the US market will be reduced to 33 per cent of the total from more than 50 per cent, while sales to the European Union market will jump to 33 per cent from 11 per cent currently.
"We expect TUF's compound annual growth rate in 2010-15 to increase from 4.2 per cent to 9.1 per cent despite its heavy debt from acquiring MW Brands," said the brokerage.
KGI Securities said the transaction was expected to be complete by November 30, or at the latest by the end of the year. Therefore, the brokerage expected MWB's performance to be reflected on TUF by 2011.
Despite a leap in interest expenses, TUF is expected to reap decent earnings of Bt4.4 billion next year, up 10.7 per cent from estimated earnings this year thanks to the contribution from MW Brands, according to KGI's research.
MWB's products offer twofold higher margins compared with TUF because of lower raw-material costs, as the company has fishing grounds in the Indian and Atlantic oceans, allowing for tuna prices 10 per cent lower than for Pacific Ocean stock. As well, it has zero tariffs on exports to the EU market; tuna exported from Thailand to the EU is subject to a 14-per-cent tariff.
Besides, TUF expects to gain more bargaining power because of the larger sales volume.
The KGI research report said: "We expect TUF and MW Brands to have lower tuna costs, which should be an immediate [advantage] for TUF. In the long run, we expect even more benefit from the acquisition."
However, KGI expected TUF's dividend payment would be capped at Bt1.2 per share for at least three years because of the debt covenant. TUF's consolidated debts after acquisition in 2011 are forecast at a total of Bt41.67 billion, comprising TUF at Bt27.39 billion and MW Brands at Bt14.28 billion. Meanwhile, consolidated sales are expected to reach Bt100.56 billion in 2011 and Bt107.02 billion in 2012.
Finansia Syrus Securities is also optimistic about the acquisition by TUF of MW Brands, noting there will be strong horizontal synergy between the two companies.
First, as MWB sells such leading global brands as John West, the UK market leader with a 33-per-cent share; Petit Navire and Hyacinthe Parmentier, recording a 29-per-cent market share in France; and Mareblu, the third-largest player in Italy with 4.5 per cent of the market. This would shift the bulk of TUF's market distribution from the US to the EU.
Second, TUF will gain benefits from expanded areas of resources via MWB, including a lower transport cost of tuna, the securities firm said.
Last, MWB has better financial ratios than TUF. MW Brands posted earnings before interest and tax of 15.7 per cent last year, while TUF posted 6.5 per cent.
Moreover, TUF's earnings after the acquisition will be large enough to cover the dilution effect in which new TUF shares will be created. Part of funds to buy MW Brands will be from a Bt2.4-billion debenture issuance, and the company will have to increase its capital by 13 per cent or 116.829 million shares from its current total capital.
Meanwhile, Kelive Research of Kim Eng Securities (Thailand) commented that the share-capital increase would result in dilution effect on shareholding of between 7 and 12 per cent.
However, the brokerage agreed on the positive effect on TUF's future market expansion and profitability, becoming one of the world's largest seafood producers with a market share of 20 per cent, covering Thailand, North America and Europe.
DBS Vickers Securities (Thailand) also highlighted several positive issues.
This deal will pave the way for TUF to expand into European aqua can market, which is the largest in the world. Currently, MW Brands has largest market share in four countries (i.e., UK, Ireland, France and Netherlands), and third largest market share in Italy. TUF will own leading brands in Europe, such as Petit Navire, John West, Mareblu and Hyacinthe Parmentier. TUF will have better diversification from higher earnings contribution from European market and less earnings dependence from the US market. TUF would be become an even larger tuna can producer in the world with 500,000tons per annum, up from almost 400,000tons currently. TUF will reach its target to become Global Supply Chain and benefit from lower import tariff in Europe. The deal would lead to a cost saving, as (i) MW Brands would no longer buy raw products from middleman, (ii) economies of scale following MW Brands having four plants and five tuna catching ships. Note that TUF currently has four tuna catching ships.
However, the deal also creates some drawbacks. Due to the big size, TUF would see its debt to equity ratio rise to 2 times and its interest expenses will jump from the debt financing.
Nonetheless, it noted that this should not post severe negative impact to its overall earnings. DBS is revising the target price.