Thai Union Frozen Products

Thai Union Frozen Products Plc (TUF)
 

What’s new? The average price of West Pacific Ocean (WPO) skipjack tuna stood at US$2,198/tonne in May, up 20% YoY and a new record, but essentially unchanged MoM ($2,195/tonne in April). The YTD mean price was $2,089/tonne, up 29% YoY. The mean price in May was up 8% from $2,030/tonne in Jan. The 60 counts/kg shrimp price had risen 9% to Bt120/kg as of early June from a low of Bt110/kg in late April. However, the current shrimp price is 17% below the price for early Jan. The YTD mean shrimp price is Bt134/kg, down 8% YoY.   
Stable tuna price in May; scope for increase: The sustained high skipjack tuna price for May would appear to support our view that it will probably rise further in the months ahead. We expect the price to be bid up modestly as a result of tighter tuna supplies, brought about by unfavorable weather conditions and 1- to 3-month closures of several Pacific Ocean fishing grounds. We forecast a mean raw tuna price of US$2,200/tonne for 2012, up 25% YoY.
Client acquiescence of a high tuna price: The market appears to have come to accept a sustained high raw tuna price range of US$2,000-2,500/tonne as normal. Hence, TUF has so far had no problems passing through higher raw material costs to its customers (its diverse client base limits the bargaining power of its clients somewhat). We think TUF can sustain a GM of around 17% this year (excluding synergy-building with MWB). Tuna sales volume should rise in 2Q-3Q12 on seasonality. Currently, 70% of TUF’s tuna sales volume is skipjack tuna; the fertility rate of this variety remains high in the West Pacific Ocean and the Indian Ocean.
A slight shrimp price recovery in May: The shrimp price slippage of 17% YTD suggests higher shrimp output in 1H12, but the slight recovery in May implies the start of high season and greater demand. We expect shrimp sales and volume to peak during 2Q-3Q12. 
Action: Our BUY rating stands, premised on TUF’s solid FY12 core earnings growth profile, proven GM sustainability, scope for synergy-building with MWB and potential for new acquisitions.