Thai Union Frozen Product

3Q14F net profit of B1.7bn and core profit of Bt1.5bn. Net profit is expected at Bt1.7bn,+69%YoY and +12%QoQ, with core profit at Bt1.5bn, +65%YoY and +8%QoQ, gradually recovering from bottom in 2Q13 with aid from the high export season during 2Q14 and 3Q14. We expect an even stronger recovery in 2H14. Thanks to the low price of raw tuna, average gross margin in 3Q14 is expected to be stable from 2Q14 at 16.1% and much better than 3Q13’s 13.9%. Behind this is the strength of its branded tuna, which had a high margin of 24%, able to make up for the continued poor margin for OEM tuna of 11% (blended tuna margin is 19%), with margin for shrimp at 11% and salmon and sardine at 16-17%. 3Q14F sales are estimated at Bt32bn, +8%YoY and 5%QoQ. TUF may book a reversal of provisions of Bt215m (pre-tax). 

Shrimp still only slowly recovering in 2H14. Shrimp is disappointing, with EMS still present. Though farmers have learned to work around the disease, it is taking longer to recover than we had anticipated. We earlier expected shrimp to be close to normal in mid-2014 but now the best we can hope for is end-2014 or early 2015. We estimate the country’s 2014 shrimp output at 200,000 tons after just 82,000 tons in 1H14. With 2015 expected to bring a rise of just 10-15% in production, recovery is clearly not rapid. 

Acquisition to lift sales to US$5bn target in 2015. The purchase of two new businesses will help TUF reach its 2015 sales target of US$5bn, up from US$4bn in 2014. Adding to its sales in 2015 will be ~US$220mn from MerAlliance, accounting for 5-6% of total sales, and US$80mn from King Oscar, 2% of total sales. We expect these two acquisitions to expand the group’s gross margin as both produce premium products. We also believe both offer good synergy with TUF group. We suspect TUF has more such purchases up its sleeve of a similar size and believe these purchases should eliminate speculation that it is interested in Bumble Bee.

TP Bt80; maintain BUY. We believe earnings will be better in 2H14 with a continued good tuna margin. Its pet food business in the US will reach breakeven after losses YoY and QoQ. After we have more details about the MerAlliance and King Oscar businesses, we will be adjusting our forecasts from 2015 onwards. We roughly estimate a rise of Bt2-5/share in the fair value of TUF after these two deals are completed. TUF will increase shares from 1.147mn to 1.192mn in 4Q14 after Standard Chartered Private Equity, the holder of convertible debentures valued at Bt2.67bn, converted their ECDs into 45.36m shares. We maintain our Buy rating with a TP of Bt80, based on 2xPBV.