Thai Union Group

Thai Union Group Plc (TU)

 

Investment thesis

Although there will be extra accounting expenses tied to the collapse of the Bumble Bee deal and provisioning expenses for the fishing fleet in 4Q15, we regard those as non-cash and non-recurring extra items. There is potential for upside to our FY16 earnings model from TU’s planned acquisitions; the focus will be branded businesses. Our FY16-18 sales forecasts remain conservative with potential growth from planned acquisitions mostly left as scope for upside. We rate TU a BUY for its solid organic growth story. But valuation-wise, CPF is currently cheaper—an FY16 PER of 12.3x against TU’s PER of 14.7x. 

Insights into 4Q15—a slight YoY core earnings rise 

We estimate a Bt600m net profit for 4Q15, down by 14% YoY and 63% QoQ. Four extra items will be booked: 1) Bt200m in expenses tied to the abandoned Bumble Bee deal (arrangement fees, capital increase expenses, etc), 2) Bt100m in legal fees, 3) Bt400m in fishing fleet impairment expenses, and 4) a Bt140m in FX gain. Note that the book value of TU’s fishing fleet is now US$50m. Excluding those extra items, core profit is assumed at Bt1.16bn, up 4% YoY but down 35% QoQ, which looks pretty good, given the weak global economy and currency volatility. 

The modest expected YoY core profit rise is due to a fatter GM (a higher proportion of branded tuna sales amid the low tuna pricing climate and lower raw tuna costs). The QoQ fall is because of low season for exports and seasonally higher SG&A. We estimate 4Q15 sales of US$915m, down by 9% YoY and 6% QoQ. But sales in baht terms should be posted flattish YoY and QoQ. GM of 16% is assumed for 4Q15, against 14.4% in 4Q14 and 17.3% in 3Q15.  

No sign of raw tuna price increase in the short-term

The mean raw skipjack tuna price peaked last year at US$1,500/ tonne in August before plunging to $1,000/tonne during Nov-Dec 2015, due to supply growth—more Chinese fishing boats and sharply lower fuel oil prices (fuel oil is the single biggest cost component of the tuna catch). We expect the prevailing low tuna pricing climate to continue through 1Q16; prices may rise modestly in 2Q16. Hence, in order to optimize profitability, TU must manage its sales strategy by increasing the proportion of branded products in its sales mix (margins for OEM products are currently wafer-thin) in 1H16, then—assuming higher tuna prices in 2H16—boosting proportionate OEM sales. We expect an $800-1,300/tonne tuna price range for FY16. 

Aggressive FY16 sales growth target range of 15-20%  

TU expects FY16 top-line growth of 15-20%, half of which is planned to be organic, the rest from acquisitions. We have factored the Rugen Fisch deal (announced in Dec 2015) into our 11% sales growth forecast for FY16 (which is more conservative than management guidance), but haven’t yet factored in any other possible M&As.