Thai Union Frozen Product

Thai Union Frozen Product Plc (TUF)

- 1Q14 net profit grows as expected
1Q14 net profit was reported at B950m, growing 16.5%qoq and
40.8%yoy (as expected); B350m extraordinary expense from
provision of inventory impairment recognized in 4Q13 was not
booked in 1Q14, and B254m Fx gain was included.
Excluding extraordinary items, 1Q14 normalized profit stayed close
to 4Q13. Sales volume was B28bn, falling 9.2%qoq, slightly lower
than the peak at B31bn in 4Q13 as a result of seasonal effect.
Shrimp processing business has stopped its production in January to
improve its food packaging assembly line. SG&A/Sales increased
from 9.3% in 4Q13 to 9.7% in 1Q14, totally negating a rebound in
gross margin. 1Q14 marketing cost was higher than usual, mainly
from COTS's campaign of Chicken of the Sea's 100th anniversary,
celebrating COTS's superiority in U.S. canned and frozen seafood
market. 1Q14 net profit made up 18% of FY2014 earnings forecast.
- Looking for M&A deal
After the analyst meeting, we still have a positive outlook on TUF in
2014. We project FY2014 net profit to grow by 83%yoy; expecting
sales volume at US$4bn and gross margin at 14.9%, in line with
TUF's target. Tuna business is likely to grow further; low material
cost would raise worldwide tuna consumption. Pet food business has
grown nicely since because U.S. Pet Nutrition has expanded its
business (trading business, in addition to contract manufacturing
business). Shrimp business would be affected by a delayed
rebound; EMS has not receded completely, so the amount of shrimp
from Thailand sold in the market would not grow as rapidly as
expected. However, TUF's weak shrimp business would be
compensated by another two strong businesses. As TUF's earnings
result has returned to normal and the financial position has become
stable with D/E ratio of 0.8x, TUF might benefit from M&A deal; the
conclusion on M&A deal would be made around 2014-2015.
- Agribusiness-food sector's top pick
We reiterate to buy. FY2014 fair value (DCF, 7.34% WACC) of B76
implies 14% upside. FY2014 average dividend yield is 3.3%p.a (paid
twice a year).