Thai Union Frozen Product

TUF buys Bumble Bee. Step up as king of world tuna business BUY

Thai Union Frozen Product Plc (TUF)

-Bumble Bee M&A deal to complete in next 6-12 months

TUF officially announced its acquisition of Bumble Bee in the US for

US$1.51bn or 8.6x of its 2014 EBITDA (10.4x EBITDA prior to the synergy).

The synergy is conservatively projected to boost TUF’s profit by US$30m in

the next three years, reducing TUF’s production cost and operating expense

mainly from raw material and processing platform. Bumble Bee’s strengths

are its strong brand and high-margin specialty products like canned tuna

and seafood. Bumble Bee’s 2014 gross margin is 23.3%, versus TUF’s gross

margin of 15.4%. Compared with most M&A deals in North America with

over 10x EBITDA, TUF acquires Bumble Bee at a reasonable price. However,

the Bumble Bee deal would be complete after it is officially approved by the

U.S. government, probably 6-12 months from now on.

- Very positive. Revise up FY2016 earnings forecast by 13.0%

We revise up TUF’s FY2016 earnings forecast by 13.0% to reflect increasing

profit from Bumble Bee 12 months after the acquisition. TUF’s sales will

increase by US$1bn and EBITDA by US$145m, while cost of debt for this

acquisition is expected to be around 4%p.a. TUF is expected to raise its

capital by 13% in 2016 via right offering (RO) method (20% discount from

the market price); D/E ratio would be 1.4x, still lower than 2x limit.

We have positive outlook about the capital increase because they would

grant TUF opportunity to seek more M&A deals at reasonable and profitable

prices as well as ensure that dividend would still be paid semiannually

without impacting TUF’s liquidity and D/E ratio.

- To up 2015 fair value to B105

We recommend buying TUF. 2015 fair value (DCF, WACC of 7.34%) is

revised up from B91 to B105, which provides a total upside of 18.3% from

the current share price (a 12.5% dilution effect and debt creation for the

acquisition already included). D/E ratio after the capital increase is

estimated at 1.5x, so dividend payment can still be expected.