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Analyst: Thai Union facing ‘major headwinds’

Rising tuna prices will continue to cause difficulties in the back end of this year, but a recovery seems likely for 2018.

Rising raw tuna prices will cause "major headwinds" for Thai Union in the second half of 2017, further suppressing its tuna margin, warned Prasit Sujiravorakul, securities analyst at Bualuang Securities. The outlook for next year, however, is more promising.

Thai Union recently posted a THB 1.41 billion (€36.1 million/$42.4 million) net profit for the second quarter of 2017, down 8 percent year-on-year and 4 percent quarter-on-quarter.

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Excluding four extra items -- a THB 17 million (€435,356/$511,321) accounting gain on fishing fleet depreciation; a THB 102 million (€2.6 million/$3.1 million) tax exemption from its Red Lobster investment; a THB 80 million (€2 million/$2.4 million) loss from discontinued fishing fleet operations; and THB 40 million (€1 million/$1.2 million) in foreign exchange gains -- core profit was THB 1.33 billion (€34.1 million/$40 million) for the period, down 8 percent year-on-year but up 42 percent quarter-on-quarter.

A gross margin squeeze and a jump in interest expenses -- which outweighed lower selling, general and administrative (SG&A) expenses, as well as recurring tax expenses and higher equity income from Avanti Feeds -- caused the year-on-year decline in core profit, said Sujiravorakul.

In addition, a weak market demand after re-pricing and weak European currencies held sales growth to only 1 percent year-on-year.

Thai Union’s gross margin softened to 13.4 percent in the quarter down from 15.9 percent in the same period a year ago, predominantly due to a jump in the raw tuna price, which was up 17 percent year-on-year as well as a stronger Thai baht.

The company’s gross margin for ambient seafood fell to 15 percent from 20 percent in the same period a year ago on lower branded and overseas export market tuna margins, while the gross margin for frozen and chilled seafood rose to 10 percent from 8 percent a year ago, due to salmon re-pricing -- producing a third consecutive quarter of positive gross margins.

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The Red Lobster restaurant business contributed THB 235 million (€6 million/$7.1 million) -- or 17 percent of its profit -- up 298 percent year-on-year and 5 percent quarter-on-quarter as dividend income and the tax credit outweighed its recurring losses.

High tuna prices to persist, salmon recovery ongoing

Looking forward, Bualuang is expecting tuna prices to remain at high levels throughout the rest of the year, but on the other hand, the salmon division is recovering.

“We expect only a moderate fall in the raw tuna price over the September to December high catch season and on through 2018 thanks to sustainability-related cost increments,” said Sujiravorakul.

In contrast, Thai Union’s salmon margin improvement is well on track due to re-pricing and stable raw material prices, while shrimp margins are also likely to improve on greater output and capacity utilization.

Revising down 2017 forecast

Although Thai Union maintains a 2020 sales target of $8 billion (€6.8 billion) -- factoring in Red Lobster’s pro forma annual sales of $2.5 billion (€2.1 billion) -- Bualuang is further revising down its net profit forecast for Thai Union in 2017.

“To reflect the strength of Thai baht against USD, lower sales volume and 1 percent year-on-year sales growth for the first half of the year, we have revised our 2017 sales forecast down 4.4 percent to THB 137 billion (€3.5 billion/$4.1 billion),” said Sujiravorakul.

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Bualuang also revised down its gross margin assumption from 15 percent to 13.5 percent to factor in diminished gross margin in the first half of 2017, as well as an expected drop in the tuna margin in the third quarter of the year after the tuna price hit a four-year high of $2,000 (€1,702) per metric ton in August.

“We believe the raw tuna price will not drop quickly or deeply going forward due to incremental sustainability-related costs,” said Sujiravorakul.

However, profitability will be the first priority for Thai Union through 2020, underpinned by cost controls and strategic innovation, food services and new products.

“With diminished sales and gross margin outweighing lower SG&A and tax expenses, we have downgraded our 2017 net profit estimate by 8 percent to THB 5.3 billion (€135.7 million/$159.4 million) and core profit by 9 percent to THB 4.7 billion (€120.4 million/$141.4 million).”

“Our target price is down 6 percent to THB 24 (€0.61/$0.72)."

Nevertheless, Bualuang’s ‘Buy’ rating stands, premised on a 2018 tuna margin recovery and the long-term growth prospects of Red Lobster in new markets and products, said the analyst.

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