Thai Union Group

Thai Union Group Plc (TU) 

 

Investment thesis

We expect the firm to make a decision on the Bumble Bee deal on December 18, 2015, the deadline for closing the agreement with the seller on whether the arrangement will proceed. Assuming the deal falls at this hurdle, we would expect the next M&A deals worth US$200-500m each to be lined up in 1H16, which will lift the overhanging concerns on the Bumble Bee deal and present scope for upside. Despite the FY15 core earnings dip led by the missed export sales, we reiterate a BUY rating on TU, premised on the expected export recovery in FY16 and upsides from 1H16 M&A deals. 

Insights on 3Q15—a YoY core earnings drop 

We estimate a Bt1.65bn net profit for 3Q15, down 14% YoY but up 17% QoQ. Stripping out a Bt33m FX gain in 3Q15, core earnings will be Bt1.62bn, down 17% YoY and 4% QoQ. The YoY weaker core earnings are led by jumps in interest and tax expenses and lower other income. The slight QoQ core profit dip is due to higher SG&A and lower other income. Despite weaker 3Q15 profit, we expect 3Q15 sales and GM to remain intact despite the continuing weak global economy (lower export volume) and highly volatile global currencies.

We estimate US$928m in sales for 3Q15, down 2% YoY and 1% QoQ but expect sales in Baht terms to rise 8% YoY and 7% QoQ, thanks to the deeply weaker THB/USD rate. The 3Q15 THB/US$ average was Bt35.4/US$, or depreciating 10% YoY and 8% QoQ against the USD, which helps to sustain blended GM in 3Q15. We estimate a GM of 16.8% in 3Q15, against 16.9% in 2Q15 and 17.2% in 3Q14. The YoY jump in interest expense is due to the Bt215m one-time reversal of an accrued interest expense of a convertible bond in 3Q14. The YoY jump in the tax expense is related to a higher tax expense on greater MWB profit.  

Seller to review Bumble Bee purchase deal in December 

Whether the Bumble Bee deal will go ahead depends on the result of the US Department of Justice (DOJ) antitrust review into the TU acquisition, the timeframe of which remains unknown. We believe that the DOJ’s wider probe into the packaged seafood industry, including price controls, will further delay its review into the Bumble Bee deal. Because the deadline for closing the Bumble Bee deal purchase agreement with the seller is on December 18, TU will soon approach the seller for its decision. Given the high uncertainty surrounding the deal, we had already factored the deal out of our projections since August 2015. If the firm decides to drop the purchase, we expect new M&A deals (US$200-500m each) to replace it in 1H16. 

FY15 sales target of US$4.5-5bn looks out of reach 

Given the expected 9M15 sales of US$2.7bn, we believe that the firm’s sales guidance of US$4.5-5bn is unrealistic, due to its missed FY15 export sales target. We currently assume only US$3.7bn sales for FY15. We believe that the downside risk to our Bt5.6bn FY15 net profit forecast is limited, assuming only Bt1.05bn net profit for 4Q15.