Thai Union Frozen Product

Thai Union Frozen Product Plc (TUF)

- 4Q13 profit to drop due to extraordinary expense, but core business to recover
We project TUF's 4Q13 net profit at B987m, falling 1.8%qoq but still better
than usual (according to 2003-2012 statistics, TUF's 4Q net profit tended to
shrink averagely by 34%qoq), as a resulting of core businesses’ steady
improvement. 4Q13 operating profit is projected to grow by 13.9%qoq.
Shrimp and shrimp feed businesses (23% of total income) have recovered as
EMS problem has subsided. Moreover, TUF's shrimp business in the US
(under COTSF) has been prosperous. For tuna business (50% of total
income), there would be no significant change compared to 3Q13. TUF is also
expected to recognize B100m insurance claims from a fire in TUF's shrimp
factory. However, 4Q13 net profit would be pressed by the following factors:
1) B330m extraordinary expense for US Pet Nutrition's reconstruction, and 2)
B100m Fx loss (versus B103m Fx gain in 3Q13), thus benefit from the
recovery in core businesses would be negated. Overall, FY2013 net profit is
projected at B3bn, contracting 35.6%yoy, 18% lower than our expectation.
- Many positive factors: weak Baht, shrimp business recovery, low tuna price and strong overseas businesses
We maintain our TUF's FY2014-2015 earnings forecast. TUF is likely to
rebound significantly from 2013, mainly thanks to domestic salmon and
processed food businesses. As EMS problem has subsided, shrimp and
shrimp feed businesses are likely to rebound, resulting in increasing shrimp
supply from Thailand in the market. Tuna business is likely to continue
growing, but not very rapidly. Raw tuna price has been decreasing and
making the three-year lowest. Income from OEM customers (23% of total
income) would be affected, as they tend to keep tuna stock low and buy
small amount of tuna products. However, tuna sales volume from TUF's
branded businesses (e.g. Chicken of the Sea, John West, Mareblu Petit
Navire and Pamentier; making up 26% of total income) is likely to rise,
thanks to the decrease in raw tuna price. Moreover, as a result of lower
competition, the branded businesses are likely to maintain their average
sales volume. Their gross margin has been growing, possibly negating
pressure from OEM business. Overall, TUF's FY2014 net profit is projected to
leap by 65.3%yoy
- Top pick for food sector. 2H13 dividend at B1/share
We recommend "BUY". We derive end-2013 fair value (DCF, 7.34% WACC)
at B79.83, implying 20%. Moreover, 2H13 dividend is expected at B1/share