Thai Union Frozen Product

Thai Union Frozen Product Plc (TUF)
Benefits from baht depreciation. Revenues are expected to reach US$3.63bn in 2013, +5% YoY and US$3.86bn in 2014, +6% YoY, below its targeted US$4bn. On our FX assumption of Bt30.5/US$ in 2013 and 2014, we estimate net profit at Bt2.6bn in 2013, -38%YoY but then recovering to Bt4.7bn in 2014, +82%YoY. 2Q13 operations were helped by the depreciation to Bt31/US$ from Bt29.68/US$ in 1Q13 and we expect this to continue through 2H13 and 2014 to Bt30.5-32/US$. Each depreciation of 1 baht to the US dollar adds Bt225mn to TUF or 5% to full year forecast, without hedging. However, TUF generally hedges ~50% of revenue from its Thai operations. This may reduce the benefit from baht depreciation from 5% to only 1.5-2.5% or Bt60-112mn.
Tuna business weaker in 2013 than in 2012. The tuna business, 49% of revenues, has been hit by fluctuating fish prices and lower sales volume, weakening margin. Tuna prices are coming down, to US$2,020/tonne in June 2013 from a record high of US$2,325/tonne in March 2013, and then down to US$1,800/tonne in July 2013. Still, this is high, and continues to turn customers away. However, clients will need to restock in 3Q13 after running out of low-priced inventory carried over from 4Q12. We estimate average gross margin in 2013F for tuna at 13%, although it reported only 11.7% in 1H13. We will watch tuna gross margin in 2H13 in hopes it turns around. 
Frozen shrimp: higher raw material prices, lower gross margin. The gross margin for the shrimp business, 21% of revenues, continues to feel the effect of the Early Mortality Syndrome (EMS) epidemic, which squeezed gross margin to only 6.6% in 1H13. In 2013 the disease is expected to cut Thai shrimp production to 250,000-300,000 tons from 550,000 tons in 2012. Shrimp price in July-August soared to a record high of Bt210-220/kg, +29%YTD, which is bad news for TUF, since it needs fresh shrimp as its major raw material; supply is also low as the disease has yet to be resolved. TUF reports that shrimp farming may return to normal in September 2013.
Revised revenues and CAPEX plan. TUF cut its 2013 sales target by ~10% from US$4bn and lowered 2013 CAPEX to not more than Bt4.5bn from Bt6bn, putting off shrimp processing factory expansion, using a factory owned by subsidiary PPC instead.
Neutral, TP of Bt57. Although core profit in the first six months of 2013 was weak at only Bt483mn, we expect this to grow to Bt800mn-Bt1bn in 2H13, with an average gross margin of 13.13% for the year. We continue to rate TUF Neutral with a target price of Bt57, based on PER of 14x in 2014; there is 18% upside to current price.