Thai Union Frozen Product

Thai Union Frozen Product Plc (TUF)  

Giving thanks for baht weakness. TUF’s earnings are being given a boost by the
depreciation of the baht in 4Q13. We had used an exchange rate for 2013 and 2014 of
Bt30.5/US$ in our forecast and calculated that each Bt1 deprecation of the baht adds
4.7% to TUF core profit. Thus, when adjusting foreign exchange to Bt31/US$ in 2013
and Bt32/US$ in 2014 from Bt30.5/US$ for both years, there is a large gain. In 2014 we
estimate this will raise EPS to Bt4.40 from our original forecast of Bt4.10.
Tuna, ~49% of revenues in 3Q13. TUF’s tuna business is also doing well, with a high
gross margin which management says came from the drop in tuna prices created by
oversupply when some tuna markets faced problems: financial in Europe and currency
volatility in the Middle East. Gross margin for MW Brands in 3Q13 rose to 19% from 18%
in 2Q13 and 14% in 1Q13 and for OEM to 9% from 7% in 2Q13 and 6% in 1Q13. This lifted
average tuna gross margin to 14% in 3Q13 from 11.5% in 1H13. The outlook for tuna
should continue bright into 2014 with fish prices stable at a reasonable level that will
entice customers to increase orders.
TUF better than peers in shrimp, ~24% of revenues in 3Q13: The continuing Early
Mortality Syndrome (EMS) has clamped down on shrimp supply. Thai 2013 shrimp
production is estimated at 250,000 tons, halved from 550,000 tons in 2012, then
recovering slowly to reach 500,000 tons in 2016. In the shrimp industry, only TUF is not
burdened by large losses. TUF was able to report a much better net profit in 3Q13 than
expected, thanks to a significant turnaround in its shrimp business. TUF told analysts
at its 3Q13 analyst meeting that its shrimp business in Thailand remains poor, but its
US operations, under U.S. Seafood Trading Unit of Chicken of the Sea, imported shrimp
from other countries and book inventory stock gains. Shrimp prices have surged 80% so
far this year and the stock gain from the lower prices made it possible for its shrimp
business to contribute 24% of total revenues. 3Q13 gross margin rose to 10% from 6.5%
TUF is also the only one with higher shrimp production YoY. Shrimp price in October
was still high at Bt275/kg, but management believes prices may start to head down on
the low export season in 4Q13 and expected return in shrimp supply in early 2014.
Upgrade to BUY and lift target price to Bt70 from Bt60. 4Q13 looks to be better
than 3Q13 due to the gradual recovery of the shrimp business and the depreciation of
the baht. TUF’s management believes the worst is over and is looking for a better core
profit in 2014 for several reasons, including the baht depreciation that will give a boost
to Thai exports. TUF should enjoy the greatest benefit of peers, with each Bt1/US$
depreciation estimated to increase net profit by 4.7%, compared to the 1-2% for CPF
and GFPT. We upgrade TUF to Buy from Neutral and raise target price to Bt70, based
on industry average PER of 16x 2014. Total return is estimated at 9.3% from upside to
target price plus dividend yield.