July 27, 2009

Thai Union Frozen Products (TUF) is expected to post spectacular earnings of Bt821 million (US$24.16 million) in the second quarter of this year, jumping from Bt403 million in second quarter of 2008, up 103 percent and Bt653 million in Q1 2009, up 25.7 percent.

Although, sales will be flat on-year at 3.0 percent, a fatter gross margin will be a key driver behind the on-year and on-quarter earnings jumps. Earnings for the first half off the year should account for 67.8 percent of full-year forecast.

Gross margin in Q2 is expected to hit 15.2 percent, up from 13.3 percent from the same period last year from 12.1 percent in the first quarter, thanks to improved margins on shrimp (accounting for 20.0 percent of total sales) and tuna (accounting for 50.0 percent of total sales). Even though, the US market and European markets remained weak in Q2, the Japanese market which offers a higher margin, were surprisingly strong thanks to the Japan-Thailand Economic Partnership Agreement (JTEPA), pushing shrimp sales up 10.0 percent and boosting the company's gross margin to notch up from 7.0 percent to 9.0 percent. Given the slow pace of price adjustment in the retail price of canned tuna, is expected to enjoy juicy margins in Q2 thanks to lower raw material costs, spurring the overall margins upward.

SG&A is estimated to sales should increase from its normal level of 7.7 percent in Q2 last year and Q1 2009 to 8.9 percent in Q2 due to the shutdown expenses of its factory in American Samoa. The total shutdown expenses were previously estimated at US$16.0 million but are expected to be revised down to US$11 to US$12 million and should be booked up to Q4 this year.

Even though the company anticipated tuna price to rise in the second half this year due to higher oil prices, the price is anticipated to be in the range of US$1,400-1,500/tonne which is still lower than last year's high price of US$2,000/tonne. TUF expects its second half margins to be stronger than the second half last year. Additionally, the recovery in the global economy should result in better demand for high-priced products, such as shrimp and seafood. Stripping out the leftover shutdown expenses of US$7.8 million, the company's operation is expected to not be worse than in first half this year.

Given its dividend payout policy of not less than 50.0 percent, TUF is expected to pay an interim dividend of Bt0.85 per share for the first half of the year, yielding 3.5 percent.

A rating of Outperform is maintained with a 12-month target price of Bt31.00 based on the discounted cash flow (DCF) method with WACC of 12.0 percent and long-term growth of 2.0 percent.