Thai Union Frozen Products

Thai Union Frozen Products Plc (TUF)

Investment thesis: Following the 2Q12 preview meeting, we expect a solid core profit for the quarter (net profit will be squeezed by a one-time financing charge). We expect below-target 2Q12 sales to be followed by top-line expansion in 2H12, led by COSI and MWB and increased shrimp sales from the Thai operation. Our BUY rating stands, premised on solid FY12 core earnings and value enhancements from a new acquisition ahead of the end of the year.
Weaker 2Q12 bottom-line … We estimate a Bt950m net profit for 2Q12, down by 23% YoY and 35% QoQ, squeezed by a one-off and non-cash accounting item related to a €250m loan prepayment (financed by the Bt9.6bn proceeds of a rights offering in May 2012).
Those expenses were acquisition fees tied to loans for the MWB purchase and were booked as deferred assets to be amortized over five years at the time of purchase. When TUF terminated those loans ahead of their maturity dates, its auditor directed it to write off the cost as a one-time item to be booked to the 2Q12 income statement. We estimate the expense at Bt600m. The item is tax-deductible under French law (MWB is headquartered in Paris), so the net impact on the 2Q12 income statement would be about Bt400m.
… but a solid core profit: Core profit (stripped of the one-off expense noted above and FX) would be Bt1.33bn, up by 14% YoY and 8% QoQ, thanks to a sustained GM of 17.2% and good OPEX control. We estimate that sales rose by 7% YoY and 5% QoQ, slower than the 11% YoY increase posted for 1Q12. In 2Q12, price competition in the US was intense, while MWB’s sales probably inched up only marginally, due to heavy rain in Europe during May-June. Also, a fire at one of TUF’s shrimp-processing plants in February resulted in lower shrimp production and sales in 2Q12.
Better 2H12 operations: We expect higher shrimp sales, stronger MWB receipts (with improved weather in the EU) and a new US marketing strategy to boost COSI’s sales. The firm guides for a 2H12 tuna price range of US$2,100-2,200/tonne—it anticipates a low catch, due to unfavorable weather and fishing ground closures. The tuna price may slip in 4Q12, which is catch high season, but the scope of the decline is likely to be modest.