November 1, 2010

Thailand's TUF to post lower earnings in Q3 2010

Thai Union Frozen Products' (TUF) Q3 2010 earnings is expected to decline by 16% on-year to THB858 million (US$28.72 million) due to Thai baht appreciation of 8% on-year and 3% on-quarter, resulting in lower margins.

The Q3 2010 earnings should be pressured by baht appreciation, fast drop in tuna prices and higher shrimp costs. Even with earnings downgrade reflecting stronger baht, the net impact from consolidated MWB should allow for improving Q4 2010 and solid growth in 2011.

A sharp drop in raw material tuna prices from the year peak at US$1,705/tonne in June to US$1,215/tonne in September (11% on-quarter decrease) did delay buying orders. Margins were also hurt by rising raw material shrimp prices. TUF's gross margin is projected to be squeezed from 16.2% in Q3 2009 to 12.7%. Sales in dollar terms, however, should grow 11% on-year, thanks to shrimp exports, shrimp feed, pet food, canned seafood and frozen squid. Shrimp exports are to show both volume and value growth based on shorter world supply following production problems in Indonesia, Vietnam and China. Given the strengthening baht, TUF is forecast to realise foreign exchange gains of almost THB400 million (US$13.39 million).

2010 and 2011 forecast were revised down by 5% and 7%, reflecting stronger baht assuming at THB31.2/US$ and THB29.4/US$, respectively. Net profit is now expected at THB3,423 million (US$114.6 million) (THB3.88/share), up 2% this year, with a 4% growth to THB3,543 million (US$118.61 million) (THB4.01/share) in 2011. In Q4 2010, TUF's results should pick up based on the delayed orders from Q3 2010, coupled with better margins following a decline in raw material costs and selling price adjustment. The earnings would be also fuelled from the consolidation of the leading canned seafood MW Brands (MWB) since November.

The acquisition of MWB will enhance TUF's profitability as MWB has fully-integrated seafood business and provides high-margin branded products more than OEM. After the merger, TUF will have fishing grounds at all major oceans with processing facilities at all regions. Based on our initial estimate, the acquisition will add 6% and 35% to TUF's bottom line to THB3,619 million (US$121.16 million) and THB4,792 million (US$160.43 million) in 2010 and 2011, respectively. This translates to a 32% growth in 2011. Despite huge debt financing, TUF's financial position should remain healthy.

TUF's fair value is revised to THB67 (US$) derived from 2011 PER of 14x.