Thai Union Frozen Products

Thai Union Frozen Products Plc (TUF)

Investment thesis
We believe TUF will benefit from the raw tuna price drop during Aug-Nov, as it should make for a fatter branded tuna GM during 1H15. In the interim, its branded tuna margin will be sustained high in 2H14, thanks to lower raw tuna price in 1H14. We also expect TUF’s OEM tuna margin to fatten in 4Q14 on lower-priced tuna stocks (note that OEM tuna GM is likely to dip a little in 3Q14). Our BUY rating stands, premised on an FY14 earnings recovery, led by stronger Thai shrimp operations (thanks to higher industry-wide shrimp output, greater utilization and synergy-building with Pakfood), sustained high branded and OEM tuna margins and a turnaround at USPN in 3Q14.
The raw tuna price retreated in August 2014 
The mean price of West Pacific Ocean (WPO) skipjack tuna was US$1,600/tonne in August, down by 15% YoY and 11% MoM ($1,800/t in July). The 8M14 mean price was $1,437/t, down by 32% YoY. We believe that the MoM slippage in the raw tuna price in August was attributable to the catch season, which starts Aug-Oct (tuna supply increases and prices drop). We expect the raw tuna price to remain in the $1,400-1,600/t range during Sep-Dec 2014.     
Positive for branded tuna margin in 1H15 
Typically, there is a four- to six-month time lag between changes in the cost of raw tuna and the GM of branded products, so we expect a fatter branded tuna margin in 1H15. The 2H14 branded tuna margin will be sustained at a high level, given the low prevailing tuna price environment during 1H14. Note that the 1H14 mean price of skipjack tuna was US$1,349/t. The GM for branded tuna was 22% in 1H14. We expect branded tuna GM to be sustained at 22-23% through 2H14, thanks to lower raw tuna prices and sales price rises for tuna products sold in the EU in Jan 2014.
The time lag between changes in the cost of raw tuna and the GM of OEM products is typically one to two months, so we expect lower raw tuna prices during Aug-Nov 2014 to yield fatter OEM tuna margins in 4Q14. Note that GM for OEM tuna may dip in 3Q14, due to higher raw tuna prices in late 2Q14. The GM for OEM tuna was 10% in 1H14. We assume OEM tuna margin of 12-13% in 2H14.
Branded tuna sales comprised 59% of 1H14 tuna sales (the remainder was OEM). Our model indicates a mean FY14 branded tuna margin of 22% (against 17% in FY13), FY14 OEM tuna margin of 11% (against 8% in FY13) and FY14 blended tuna margin of 17% (against 12% in FY13).