Thai Union Frozen Products

Investment thesis

Following the analyst meeting, we expect TUF’s earnings recovery to continue playing out through 2H14 (YoY and HoH growth), led by fatter branded tuna margins, greater Thai shrimp profitability and a turnaround at USPN. There may be scope for upside to our forecast if the firm acquires a new food company in FY15. BUY!   

Insights into 3Q14—the YoY and QoQ core profit jumps

We estimate a Bt1.85bn net profit for 3Q14, up by 84% YoY and 22% QoQ. Stripping out FX, core earnings would be Bt1.75bn, up by 94% YoY and 27% QoQ. During the quarter, TUF reversed an accrued interest expense provision amounting to Bt215m (which had been booked in 2Q14) because a holder of a big tranche of convertible bonds (CBs) exercised its call option to convert them into 45.36m shares at Bt52.91/share. Hence, interest expenses would have fallen in 3Q14. In the absence of CB conversion, our core profit estimate would be Bt1.54bn for 3Q14, up 70% YoY but down 4% QoQ. 

The expected YoY core profit jump is due to fatter GM for branded tuna margin (led by the low tuna pricing environment in 1H14 and sales price increases for branded EU tuna products since early 2014), greater OEM sales volume, thanks to more promotional activities, fatter shrimp margin as a result of a higher proportion of value-added shrimp products in the sales mix and break-even at USPN. The estimated QoQ rise was led by high season and break-even at USPN. GM should have risen to 16.7% in 3Q14 from 13.9% in 3Q13 and 16.1% in 2Q14. 

Tuna price volatility in 3Q14—not much of a concern 

Because of the greater proportion of branded tuna in the sales mix (~60% of TUF’s tuna sales), we believe that the 4Q14 blended tuna margin will be sustained, despite raw tuna price volatility during 3Q14. Branded tuna margin is supported by the low tuna pricing environment that prevailed through 1H14. Note that there is a 4- to 6-month time lag between a change in the cost of raw tuna and branded tuna GM rising or falling. The 3Q14 raw tuna price volatility might squeeze OEM tuna margin in 4Q14, as there may be stock losses on high-priced inventory, but we believe that fatter branded margin will outweigh the effect of slimmer OEM margin for the quarter.       

The raw tuna price looks set to be low in the US$1,000-1,400/tonne range during 4Q14, due to colder weather in major fishing grounds (which causes tuna to swim nearer the surface, making them easier to catch) and an expanded global fishing fleet. Hence, we expect a fatter branded tuna margin in 1H15.