Thai Union Frozen Products

Thai Union Frozen Products Plc (TUF)  

Investment thesis

TUF’s 4Q14 earnings outlook is strong, led by sustained high branded tuna margin and better numbers at USPN (even though lower raw tuna and shrimp prices will squeeze GM for OEM tuna and frozen shrimp). We have trimmed our FY14 profit estimate by 4% to Bt5.48bn to factor in a higher SG&A assumption, but maintain our FY15 forecast unchanged. Our BUY rating stands.  

Insights into 4Q14—the robust YoY core profit rise

We estimate a Bt1.09bn net profit for 4Q14, up 33% YoY but down 44% QoQ. Stripping out extra items in 4Q13 and 3Q14 and FX, core earnings would be Bt1.02bn, up 80% YoY but down 48% QoQ. The assumed robust core earnings were driven by a fatter GM for branded tuna (led by lower tuna prices in 2H14 and sales price rises for branded tuna products in Jan 2014), greater branded sales volume (more marketing), a USPN turnaround, the two-month consolidation of King Oscar and MerAlliance (which added ~Bt1.7bn to TUF’s 4Q14 sales and Bt75m to its net profit) and lower interest expenses. 

The expected QoQ core profit drop is due to declines in OEM tuna margin (caused by the raw tuna price fall in 4Q14 and high carrying costs for inventory in 3Q14) and OEM volume (low season), frozen shrimp margin squeeze (led by a falling shrimp price in 4Q14), seasonally high SG&A, greater financing costs (arrangement fees for bridge loans to fund the purchase of Bumble Bee) and a lower MWB net profit in baht terms (the euro weakened). 

We assume GM of 14.2% in 4Q14, against 12.9% in 4Q13 and 17.2% in 3Q14. GM for branded tuna products will have jumped from 15.2% in 4Q13 to 24% in 4Q14 (24.4% in 3Q14), due to a lower raw tuna price in 2H14. The GM for OEM tuna products will have declined from 8.2% in 4Q13 to 7.8% in 4Q14 (9.1% in 3Q14), also because of a lower raw tuna price. GM for frozen shrimp will have fallen from 13% in 4Q13 to 9% in 4Q14 (10% in 3Q14), due to a lower shrimp price. 

GM target of 20% by 2020 

We expect the Bumble Bee acquisition to be sealed in 3Q15 or 4Q15. The US regulators will take 6-9 months to review the case. TUF is confident that it can close the deal. We expect TUF’s organic FY15 sales growth at 10% and about US$550m in sales from three acquired firms—$220m from MerAlliance, $80m from King Oscar and $250m from Bumble Bee (assuming that recognition starts in 4Q15). FY16 organic sales growth is expected at 5-6% and inorganic sales growth next year will be driven by full-year revenue from Bumble Bee. The firm targets GM of 15-16% for FY15, rising to 20% for FY20, driven by margin-enhancing product innovations.