Minor International

Investment thesis

We expect TUF’s branded tuna margin to fatten in 2H14-1H15 as a result of the low tuna pricing environment, which should outweigh the effect of OEM tuna margin squeeze in 4Q14 (due to losses on higher priced inventories). Investor concerns over the risk to tuna margin during this volatile pricing period should ease because branded tuna now comprises 60% of the tuna sales mix, up from 53% in FY13. Our BUY rating stands, led by a greater profit at the Thai shrimp unit, fatter branded tuna margin, 2H14-1H15, and a USPN turnaround in 3Q14.

The raw tuna price plunged in Sept 2014  

The mean price of West Pacific Ocean (WPO) skipjack tuna was US$1,280/tonne in Sept, down by 32% YoY and 20% MoM ($1,600/t in Aug). The 9M14 average price was $1,419/t, down 32% YoY. We attribute the scale of the MoM fall in Sept (which was steeper than we had expected) to greater tuna supply during the catch season (which starts in July), led by new boats and more advanced catching techniques. We expect the Oct raw tuna price to decline further to $1,000-1,200/t before bouncing in Nov or Dec (the end of catch season). 

Net positive blended tuna margin for 2H14-1H15  

There is typically a four- to six-month time lag between changes in the cost of raw tuna and the GM of branded products, so we expect the fall in raw tuna prices during Aug-Oct to make for a fatter branded tuna margin in 1H15. We still assume the GM for branded tuna at 23% in 2H14-1H15 (against 22% in 1H14).

Although the dive in raw tuna prices during Aug-Sept is negative for the OEM tuna margin in 4Q14, due to stock losses on high-priced inventories, we believe that it will constitute only a one-time hit in 4Q14. The time lag between changes in the cost of raw tuna and the GM of OEM products is typically one to two months. Despite the expected OEM tuna margin squeeze in 4Q14, TUF will gain from greater OEM sales volume as a result of low tuna prices. We have a diminished expectation for the GM of OEM tuna in 2H14—9% against 10% in 1H14—thanks to assumed inventory losses. 

Given the greater proportion of branded tuna in the sales mix in 2H14-FY15, under the low tuna pricing environment we estimate a net positive impact on TUF—fatter branded tuna margin should outweigh the effect of OEM tuna margin squeeze. We assume blended tuna GMs of 17% for 2H14 (17% in 1H14) and 18% for FY15.