November 5, 2010

Thai Union Frozen Products' gets weak earnings on higher raw material costs

Thailand's Thai Union Frozen Products (TUF) posted soft Q3 2010 earnings of THB817 million (US$27.56 million), declining 19.7% on-year from THB1 billion (US$0.03 billion) in Q3 2009.

The earnings for the said period are also 6.4% lower on-quarter from THB873 million (US$ 29.45 million) in Q2 2010.

The result was 7.8% below the market consensus and 8.6% below expectation. A weaker-than-expected gross margin and FX gains were the reason for the earnings miss. Earnings declined on-year and on-quarter due to a lower gross margin. Forecast will not be revised until the company's president, K. Thiraphong Chansiri, provides more information on MW Brand.

US dollar sales were US$555 million in Q3 2010, up 11% on-year, boosted by decent growth in shrimp sales of 23%. The nine-month US dollar sales hit US$1.6 billion, up 6% on-year, but down 2% on-year in baht terms due to appreciation of the baht.

TUF's gross margin declined to 12.5% in Q3 2010, from 16.2% in Q3 2009 and from 15.6% in Q2 2010 due to higher tuna costs carried from Q2 2010 and a 20.0% increase in shrimp costs. The average tuna price in Q2 2010 was reported at US$1,533/tonne, jumping 28.5% on-year and 47.4% on-quarter. The cost of shrimp is mostly in baht so its appreciation implies a lower gross margin as the company cannot swiftly pass the higher costs on to its customers.

Given its weak profitability, ROE declined to 4.3% in Q3 2010, softening from 5.8% in Q3 2009 due to lower margins. Its DE ratio decreased to 1.0x from 1.1x in Q3 2009 thanks to debenture repayment. Its cash flow was solid with operating cash flow of THB2.5 billion (US$0.08 billion). We are not concerned about the company's financial strength.

The Q4 2010 outlook is promising and expected to be the peak quarter of the year thanks to more stability in the baht and lower tuna cost. The company will also consolidate the operation of MW Brands for two months of the quarter.

A rating of Outperform is maintained with a 12-month target price of THB80 (US$2.7) based on the discounted cash flow (DCF) method with WACC of 12.4% and long-term growth of 2.0%.