Thai Union Group

Thai Union Group Plc (TU) 

 

1Q16 net profit was Bt1.2bn (Bt0.26/sh), -19% YoY but +65% QoQ, 20% above our estimates and 8% above consensus, largely from FX gain of Bt264mn. Excluding extra items, 1Q16 core profit was Bt1bn, +52% YoY but -35% QoQ, in line with our forecast. The YoY rise was backed by better sales (+9% YoY), wider gross margin (+170bps YoY) and lower interest expenses (-20% YoY), outpacing the higher SG&A/sales (+110bps YoY). The drop QoQ was seasonal. Its 1Q16 core earnings accounted for 15% of our full-year forecast (vs. 11% over the past five years), and we maintain estimates. 

 

1Q16 highlights by segment. Of total 1Q16 gross profit, 43% came from tuna, 18% from shrimp, 11% from sardines, 5% from salmon, 11% from pet food, and 12% from others. TU’s 1Q16 gross profit increased 20% YoY to Bt4.8bn due to improvement in all main segments from both organic and inorganic growth together with gains from a weak baht against the US$ (+9% YoY) and euro (+7% YoY). Gross profit for tuna and shrimp units rose 25% YoY and 21% YoY thanks to a wider margin brought by low raw material prices and tuna business adjustment in the US market (shifting focus to product profitability over market share). Gross profit for the sardine and salmon units grew 22% YoY and 3% YoY, mainly from the acquisition of Rugen Fisch in Feb. Gross profit for the pet food unit jumped 52% YoY from the successful USPN business restructuring and the launch of more high value-added products.  

Company guidance  

 

 TU expects full consolidation of Rugen Fisch (4-5% of sales) for the rest of 2016. 

 

Though tuna price recently picked up to US$1,610/ton in April (+46% YoY and +28% QoQ), its tuna operations should remain healthy as it has inventory for 1-2 quarters of the lower priced raw material, plus higher OEM sales volume and greater focus on profitability in the US market. The shrimp unit will move up in tune with greater sales volume on seasonality. The turnaround in the pet food business will continue.    TU maintains its 2016 sales target of US$4.5bn (+22% YoY), with a gross margin of 16%, and SG&A/sales of 10%. Our sales assumptions of US$3.9bn (+7% YoY) are below its target (difference lies in its plans for more M&As), while others are in line.  

 

 TU expects the 2016 review of the Thai fishing industry under the US TIP report and EU IUU fishing report in June-July. In the worst case, operational impact on TU will be minimal. Only 13% of TU’s sales came from exports to the US, with 5% to Europe. Also, only 3% of TU’s raw material was sourced from Thai fisheries, and it has the option of buying from others. TU can also switch production to facilities overseas.  

 

 TU maintains its 2020 revenue target of US$8bn. Of the additional revenue of 

 

US$4bn over the next five years, US$1.7bn will come from organic growth (+7% p.a.), US$1.2bn from its new global food service, emerging markets and marine ingredient divisions and a new innovation center, and US$1.4bn from more M&As. TU targets gross margin at 20% in 2020F from 16% in 2015 from more high-margin products. 

 

Maintain BUY. We maintain BUY on the counter with end-2016 PT of Bt25, based on 18x PE. We like TU which is looking at greater earnings improvement in 2Q16F on seasonality and gains from the weak baht, plus upside potential from new M&As.