Thai Union Frozen Products

Thai Union Frozen Products Plc (TUF) 
Core profit in line with estimate
TUF posted 3Q13 net earnings of Bt1bn, down 38% YoY but up 180% QoQ. Stripping out a Bt103m FX gain in 3Q13, core profit was Bt901m, down 35% YoY but up 51% QoQ. Net earnings were 8% higher than our estimate, due to a greater FX gain than modeled. But core profit was in line with our number. GM was 13.9%, close to our assumption.
Result highlights
The YoY drop was due to slimmer GM for the tuna and shrimp businesses, a deeper loss at the US pet food unit (USPN) and higher tax expense (due to greater overseas profits). The QoQ jump was led by a Thai shrimp turnaround, strong numbers at the US frozen seafood unit, an improved OEM tuna business and sustained good results for overseas branded tuna operations.
Total sales inched up 3% YoY in US dollar terms, led by sales of shrimp and value-added products. Sales of OEM tuna and sardine products dipped during the quarter (despite it being high season for the products). GM dropped YoY to 13.9%, due to due to a slimmer OEM business GM (tuna and shrimp) and a deeper loss at USPN. But GM fattened QoQ on recoveries in the shrimp and tuna operations.
Outlook
Management has revised down its FY13 sales target by 3% to US$3.7bn (still up 7.5% YoY), but for FY14 guides for 10% growth in greenback terms and GM of at least 14%. Next year TUF will focus on boosting profitability and efficiency and reducing debt and CAPEX. It has set an FY14 CAPEX ceiling of Bt3.5bn, as it has no big-ticket investments plans. The firm also aims to reduce USPN’s loss from US$24m in FY13 to $3m (or break-even) in FY14. The fall in the raw tuna price to a three-year low of $1,700/tonne in Nov might have delayed client purchase orders during late 3Q13. But TUF believes it is a short-term phenomenon and the tuna price will soon rebound.    
We expect OEM tuna sales and GM to improve QoQ in 4Q13. Moreover, the GM of branded tuna will rise on declining raw tuna prices. The GM of Thai shrimp operations will gradually expand, driven by increased shrimp production in Thailand.
What’s changed?
We have upgraded our FY14 earnings forecast by 10% to factor in higher shrimp sales and GM assumptions. Our target price rises 13% to Bt68.
Recommendation
Our TRADING BUY rating stands, premised on anticipation of an FY14 core earnings jump.

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