July 23, 2013
Thai Union Frozen reports a poor Q1 2013 results
Thai Union Frozen (TUF) Product Plc did poorly in Q1 2013 with core profit of just THB124 million (US$4 million), down 80% on-quarter and -90% on-year.
TUF reported a net profit of THB674 million (US$2.8 million), a 10% increase on quarter but -54% on-year but removing extra items and foreign exchange gain gives a core profit of just THB124 million (US$4 million), down 80% on-quarter and -90% on-year. Behind the sad showing was weak gross margin for both tuna and shrimp, together accounting for 71% of 2013 fiscal sales: tuna margin was slashed to 10% in first quarter of 2013 from 14.83% in 2012, and the margin for shrimp & related business halved to 6.5% in first quarter 2013 from 12.06% in 2012.
The tuna business, which provides 49% of revenues, has been buffeted by fluctuating fish prices coupled with lower sales volume, together weakening margin. The sharp rebound in raw tuna price to a record high of US$2,325/tonne, or an increase of 22% from the low point of US$1,900/tonne at the end of 2012, made a big dent in customer purchases. We believe TUF's tuna sales volume improved in second quarter of 2013, as customers likely ran out of low-priced inventory carried over from fourth quarter 2012 and thus needed to restock. However, we expect margin in second quarter 2013 to continue poor, with a real turnaround evident in third quarter 2013. The 2013 average gross margin for tuna is expected to inch back up to 13.03%, with a rebound to 15% in 2014.
The gross margin for the shrimp business, contributing 21% of revenues, continues to be hurt by the on-going Early Mortality Syndrome (EMS) epidemic. This has resulted in a shrimp supply shortage and price surge, pushing costs up. The disease slashed annual Thai shrimp production to 250,000-300,000 tonnes from 550,000 tonnes. Shrimp is heading for another barrier next January (2014) when gross sales price on processed shrimp exported to Europe will be cut and import tax raised to 20% from 7% for cooked shrimp and to 12% from 4.2% for frozen.
TUF has not performed well for two quarters in a row - fourth quarter 2012 and first quarter 2013 - but we believe things are looking up and expect gross margin to improve in second quarter 2013 to 12.3% from the average of 10.9% in first quarter 2013, with a core profit of THB400-500 million (US$13 million-16 million).
We expect quarterly core profits to improve to THB800 million-THB1 billion (US$26 million-32 million) in second half 2013 and gross margin to rise to 14-15%, with the year's average gross margin of 13.13%. Leading the turnaround will be higher tuna sales volume and gross margin, the high season in third quarter, improved operations at the US Chicken of the Sea operations as well as MW Brands in Europe, plus increased shrimp output and shrimp feed sales as shrimp supply begins to return in third quarter 2013. We also expect pet food margins to widen further in second half of 2013. We tag this stock Neutral with a target price of THB60 (US$1.94), based on PER of 14x in 2014.
