Thai Union Frozen Products

Thai Union Frozen Products Plc (TUF)

 

Investment thesis     

Following the analyst meeting, we believe that its fundamentals remain strong in FY15, led by the full-year consolidation of King Oscar and MerAlliance, the stable tuna margin, the strong shrimp recovery in 2H15 and partial revenue recognition from Bumble Bee (if the deal is approved by the US antitrust authority, also in 2H15). We have cut our FY15 profit forecast by 7% (to Bt6.59bn) to factor in expenses related to the Bumble Bee acquisition deal, which started from 4Q14. Our YE15 target price declines 9% (to Bt23.50), which has already factored in the new capital increase to support the acquisition. 

Recap of 4Q14 results—core profit above estimate  

TUF posted a Bt698m net profit for 4Q14, down 14% YoY and 64% QoQ. Stripping out a Bt244m FX loss and three extra items in 4Q14—1) Bt47m reversal of allowance from the asset write-down at the USPN unit, 2) Bt152m allowance for asset write-down at the shrimp operations and 3) Bt69m acquisition fee mostly related to the Bumble Bee deal—core profit would be Bt1.12bn, up 98% YoY but down 43% QoQ. Net profit undershot our model by 36% due to the FX loss and the above extra expense items. However, core profit exceeded our estimate by 10%, due to greater other income than we assumed. 

The YoY core profit jump was due to fatter GM for branded tuna margins (related to a sales price rise since Jan 2014), a USPN U-turn and the two-month merging of King Oscar and MerAlliance. The QoQ drop was led by lower GMs for branded tuna margins (low season), pet food, value-added products and shrimp business, a seasonal rise in SG&A and lower MWB profit (weaker EURO against THB). 

Central themes acquired at analyst meeting 

We expect branded tuna’s GM to normalize in a 20-22% range in FY15, or stable YoY, given the heavier promotions and intensified competition. The low tuna pricing environment expected in FY15 will boost OEM tuna sales volume growth. The Thai shrimp industry will recover gradually in FY15 with the majority of growth in 2H15, which will support TUF’s shrimp export sales. Sales of sardine, mackerel and salmon will grow strongly in FY15 on the full-year consolidation of MerAlliance and King Oscar. The merger will enhance sardine and mackerel GM due to its premium product offerings. 

The pet food margin should be stable in FY15 following the USPN restructuring, completed in FY14. Lobster sales will jump with the co-operation of Orion Seafood International. It maintains the targets of US$5bn sales and GM of 15-16% for FY15. We forecast a Bt1.2bn core profit for 1Q15, up 58% YoY and 8% QoQ.