Thai Union Group

Thai Union Group Plc (TU) 

 

Investment thesis

We have upgraded our target price by 3% (to Bt23.25), to factor in our upgraded FY16-20 earnings forecasts from the 40% stake acquisition of Avanti Frozen Foods Private Limited (AFFPL) effective from May 2016. Its 1Q16 core earnings will post a YoY jump led by solid organic growth and the two-month consolidation of Rugen Fisch. The recall of canned tuna in the US will have only an insignificant financial impact on TU, as the product damage is fully covered by insurance. Our BUY rating stands, premised on solid organic growth and scope for upside from new acquisitions during 2016-20. 

Insights into 1Q16—a YoY core earnings jump 

We model a Bt1.2bn net profit for 1Q16, down 20% YoY but up 58% QoQ. Stripping out FX, core profit would be Bt1.15bn, up 91% YoY but down 19% QoQ. The strong YoY core earnings jump is led by a strong rise in sales, fatter GM, drops in interest and tax expenses and a big jump in equity income related to stronger profit of Avanti Feeds. We estimate 1Q16 sales of Bt31.8bn, up 11% YoY (led by 9% from organic sales growth and 2% from the two-month consolidation of Rugen Fisch) but down 5% QoQ (thanks to low season). We assume a GM of 15.5% for 1Q16, against 13.8% in 1Q15 and 15.7% in 4Q15, led by improved EUR currency against THB in 1Q16. 

Despite the heightened US competition, COSI’s margin will improve slightly in 1Q16, led by OPEX reduction, the termination of less competitive product lines and the focus on product innovations. MWB will remain solid in 1Q16 amid EU economic slowdown from terrorist attacks. Shrimp exports from Thailand will jump significantly in 1Q16 on the greater industry-wide shrimp output. Domestic sales will remain weak in 1Q16 on smaller domestic consumption figures.

Temporary tuna price surge in March 2016

The mean skipjack tuna price surged to US$1,600/tonne in March, or a 37% MoM jump (from $1,170/tonne in Feb), due to the short-term supply shock caused by the unsettling issue of oceanic fishing rights sale between US and PNA countries consisting of eight signatories that control 25-30% of the global tuna supply and 60% of the Western and Central Pacific tuna supply. However, this issue has now been settled. Hence, we think that the tuna price is likely to normalize in the next few months. We reiterate our view that tuna price will stay in the $1,000-1,500/tonne range in 2016, led by excess tuna supply from greater fishing boats from China and Southeast Asia countries. 

Value accretion from 40% purchase of Avanti Frozen Foods 

The 40% stake acquisition of AFFPL will diversify the TU group’s shrimp sourcing, expand the group’s production capacity, domestic market in India and AFFPL’s export markets to China (which is a net seafood importer) besides the US, EU and Japan. Assuming AFFPL’s new 50 tonnes/day capacity increase in 2H16, we estimate that a 40% acquisition of AFFPL generates net profits to TU of Bt45m in 2016 (or adds 0.8% to TU’s 2016 consolidated profit) and Bt110-122m during 2017-19 (or adds 1.5-1.7% to TU’s 2017-19 consolidated profit).