Thai Union Frozen Products

Thai Union Frozen Product Plc (TUF)

3Q12 profit projected to hit new high due to high season and decreased interest expense

TUF’s 3Q12 net profit is projected to stand at B1.63bn which is the quarterly
new high, growing by 62.6% QoQ and 4.3% YoY due to the following
reasons. 1) The total sales tend to grow by 6% QoQ due to benefits from
high season, boosting sales of tuna (50% of total sales), sardine and
mackerel (6% of total sales). 2) The financial expense is projected to drop
significantly by 62% QoQ due to the debt expense that has decreased after
the company’s capital raising for debt repayment. Moreover, there’s no
extraordinary expense from debt repayment before due date like one in 2Q12
(around B400m). However, in 3Q12, TUF has a pressure from the gross profit
margin that tends to decline to 15.7% (from 16.9% in 2Q12) as a result of
production cost of shrimp business (22% of the total sales) that has leaped
along with the price of vannameis and the aggressively-rising price of animal
feed. Although the selling price still can’t keep up with the mentioned cost, it
is believed to ascend in 4Q12. Furthermore, the average Baht value in this
quarter has appreciated so rapidly that 3Q12 gross profit margin has
decelerated from the prior quarter. Nevertheless, FX profit at B230m has
helped offset almost every negative factor from Baht appreciation. For other
items, there’s projected not to be any change. Overall, 9M12 net profit
forecast is projected at B4.1bn or 15.1% growth from the same period of last
year, considered 68% of our FY2012 net profit forecast.

4Q12 profit projected to decelerate slightly but FY2012-13 profit still constantly rises to new high

We project TUF’s 4Q12 operating result to weaken slightly from 3Q12 due to
the arrival of low season, probably resulting in QoQ decrease of total sales in
4Q12. However, we’re convinced that the company would revise up the
selling price of tuna and shrimp products to reflect the increased production
cost in 3Q12. Accordingly, the gross profit margin is projected to reach the
company’s target at 17% (from 15.7% in 3Q12), sustaining 4Q12 net profit
not to fall substantially. Moreover, according to FY2012 net profit forecast, it
still has soared to hit the year’s new high (continuously to 2013) with the
supports from being advantageous as the world-class leader of seafood
business and well-rounded business. Hence, TUF is able to control the
production cost at level that’s lower than peers’. Combined with being a
globally well-known brand, the company has a higher chance to expand to
new markets. In addition, the stronger financial structure opens to chances of
finding new international investment in countries with economic crisis, which
is projected to be concluded soon.

TUF: top pick of agriculture-food sector

We still choose TUF as a top pick of food sector. Fair value, using DCF (7.4%
WACC), at end of 2012-2013 stands at B80 and B94 respectively. We believe
that TUF is very likely to outperform the sector’s average in the next 3-6
months due to hope toward conclusion of new round of M&A, which would
lead to revisal of forecast and fair value once again.