Seafresh Industry Plc
Action and recommendation
- Earnings turnaround as expected; Outperform rating maintained. The
rebound in CFRESH’s 1Q14 earnings to positive territory confirms our view of the
turnaround story in the shrimp business. In addition, the contraction in shrimp
prices since April 2014 and the arrival of the shrimp crop season in May to July will
add more excitement to CFRESH’s earnings outlook and the attractiveness of the
stock. We maintain our Outperform rating on the stock with a 2014 fair value of
Key investment points
- Impressive 1Q14 earnings. In 1Q14, CFRESH reported its first net profit
following 4 consecutive quarters of loss. The 1Q14 net profit came in at Bt108mn,
turning from net losses in 4Q13 and 1Q13 of Bt63mn and Bt22mn, respectively. A
margin expansion driven by stable raw material prices and product price increases
was the key factor behind the strong improvement. Although an unexpectedly high
FX gain swelled earnings, the 1Q14 result was still strong after this item was
- Volume and price boosted revenue YoY. 1Q14 total revenue was reported at
Bt1,788mn, up 32% YoY but down 18% QoQ. The YoY increase was due to
improvements in both sales volume and selling prices, in line with the uptrend in
raw material prices. However, the slowdown QoQ was due to seasonal factors.
- Gross margin back on track. Clearly, the main driver of CRESH’s impressive
recent performance was the recovery in profitability following a raw material price
crisis that had hurt its margin for a year. 1Q14 GPM improved to 12.3% from 7.7%
in 1Q13 and 0.3% in 4Q13, thanks to the stabilization of raw material prices
coupled with product price increases.
- Slight improvement in associated company performance. Income from
associated companies in 1Q14 also turned to the black at a positive Bt3mn from
losses in 1Q13 and 4Q13 of Bt21mn and Bt10mn, respectively, signaling a return to
breakeven point of its associated company, Belize Aquaculture.
- Large FX gain added more excitement to earnings. CFRESH reported a FX
gain of Bt35mn in this quarter. Excluding this item, core net profit was still
attractive at Bt73mn from core losses in 1Q13 and 4Q13 of Bt22mn and Bt63mn,
- On the road to recovery. 1Q14’s strong results were in line with our view on
CFRESH’s turnaround story despite the huge unrealized FX gain of Bt88mn, which
we believe was booked as revenue (Bt53mn) and other income (Bt35mn).
Excluding this uncertain item, 1Q14 adjusted GPM still improved nicely to 9.6%
from below 5.0% in the previous 4 quarters. More clarification from management
on the unexpectedly high FX gain is required in order to identify the impact of this
item on the company’s earnings outlook.