Thai Union Frozen Product

Thai Union Frozen Product Plc (TUF)

- 1Q14 to grow strong despite low season
We project TUF's 1Q14 net profit at B1bn, growing 24%qoq and 49%yoy;
B150m Fx gain would be included, and B350m extraordinary expense from
provision of inventory impairment recognized in 4Q13 would not be booked
in 1Q14. Excluding extraordinary items, 1Q14 normalized profit is expected
to drop 5.7%qoq but leaping over twofold yoy. Sales volume is projected at
B29bn, falling 4.7%qoq but rising 20%yoy, slightly lower than the peak at
B31bn in 4Q13 as a result of seasonal effect. Shrimp processing business has
stopped its production in January to improve its food packaging assembly
line. Meanwhile, pet food business has grown strong because U.S. Pet
Nutrition has expanded its business (trading business in addition to contract
manufacturing business). SG&A/Sales is expected to increase from 9.3% in
4Q13 to 9.5% in 1Q14 as a result of higher-than-usual marketing cost from
COTS under the campaign of Chicken of the Sea's 100th anniversary.
- Uptrend in 2Q14-3Q14
We maintain our FY2014-2015 earnings forecast, projecting net profit to
grow by 83%yoy in 2014 and 18%yoy in 2015. 2Q14-3Q14 would be an
uptrend for TUF's profit. Shrimp and shrimp feed businesses have been
improving after EMS recedes, thus increasing the amount of shrimp product
in the market in June and July. Tuna business is likely to grow as well. Lower
raw material (tuna) cost would improve profitability for TUF's branded tuna
business (Chicken of the Sea, John West, Mareblu Petit Navire and
Pamentier). Also, as the competition has become less fierce, TUF can
maintain its average selling prices. Feed mill raw material cost (corn,
soybean meal) has been increasing as a result of worldwide unfavorable
weather for production, adversely affecting livestock business (chicken and
swine). However, it is not likely to threaten TUF. Most of TUF's raw tuna
comes from fishery, and TUF feeds tuna and shrimp with fish meal.
- Agribusiness-food sector's top pick
We derive FY2014 fair value (DCF, 7.34% WACC) at B76, implying 13%-14%
upside, with good dividend yield (paid twice a year). We recommend buying.