Thai Union Frozen Product

Thai Union Frozen Product Plc (TUF)

2Q13 profit projected to drop 24% qoq, shrimp and tuna businesses not blissful
We project TUF's 2Q13 net profit at B512m, the 10-quarter lowest, falling
24% qoq as the company has not recognized insurance cover from a fire in
shrimp factory (earned insurance cover of B215m in 1Q13). If the item is
included, 2Q13 norm profit would grow 11% qoq, thanks to the following:
1) 2Q13 total sales is projected at B27bn, rising 10% qoq, as TUF
recognized PPC's total 2Q13 financial statement (PPC's proportion is 6% of
TUF's total income), as well as tuna sales that had increased due to high
season for the export to oversea food businesses. 2) TUF's 2Q13 gross
margin is likely to rise to 12.5% from 10.9% in 1Q13, despite facing severe
fluctuation in raw materials cost of shrimps and tuna. As baht rapidly
weakened by 6% from 1Q13, it boosted TUF's sales in the export business,
likely to raise TUF's gross profit margin forecast. However, using forward
trade contracts strategy to avoid risk caused TUF slight Fx loss at B150m,
compared to 1Q13 gain at B336m. Overall, 1H13 net profit is B1.2bn,
decreasing implicitly by 52% yoy, which is only 24% of previously projected
FY2013 earnings forecast.
- Earnings forecast decreases 27%, shrimp business recovery more sluggish than expected
We revise down FY2013-2014 net profit projection by 27% and 10%,
respectively. We reduce TUF’s gross profit margin forecast from 15.1% to
13.3%. TUF’s shrimp business (20% of total income) has still been pressed
by rise in raw materials cost of shrimp. Recent shrimp price (24 July 2013)
has continuously soared to B210/kg, a record high, due to shrimp disease.
Moreover, entrepreneurs have not risked growing shrimps. Thus, Thailand’s
shrimp production has decreased more severely than projected. For tuna
business (50% of total income), TUF might still face severe fluctuation in
raw materials cost. Therefore, TUF cannot deal with inventory efficiently
compared to 2012, which is harmful to TUF’s gross profit margin. Overall,
after revising down our forecast, FY2013 would drop 22% yoy, but surging
56% yoy in 2014 after shrimp disease in Thailand is solved.
- Short-term pressure. Reiterate "HOLD"
After revising down our forecast, end-2013 FV (DCF, 7.34% WACC) falls to
B62 (from B64). We believe that the fair value has undergone correction,
reflecting negative factors from worrying 1H13 earnings. As shrimp disease
exists, stock price would still be pressed. We reiterate “HOLD” to gain
dividend.