Thursday, April 9, 2015 Company Visit/ 1Q15 Earnings Preview Thai Union Frozen Product TUF Rec. : BUY TUF+Bumble Bee to boost 2016 profit 66%yoy TUF is substantially undervalued when compared with its business outlook for 2016. After fully including earnings of Bumble Bee, TUF’s total sales would achieve a target of US$5bn, net profit base would get near US$10bn, P/E ratio would decrease to 11x, and dividend yield can be expected above 4%p.a. Strong net profit rebound projected in 1Q15 We estimate TUF’s 1Q15 net profit at B1.1bn, growing 61.5%qoq and 18.7%yoy. Total sales are projected at B33bn, rising 2.1%qoq and 19.7%yoy, thanks to consolidation of its financial statement with MerAlliance and King Oscar (TUF holds 100% stake) for a full quarter (in 4Q14, earnings of the two subsidiaries were recognized only two months). Overall, consolidated net profit from the subsidiaries is estimated at B90m in 1Q15. In addition, a low tuna raw material price of US$1,200/ton on average in 4Q14, down as much as 23.9% from 3Q14, will fully benefit profitability of TUF’s tuna business in this quarter because its average product price is almost the same, making gross margin in 1Q15 increase to 15.0%. SG&A/sales would drop slightly from 10.3% in the previous quarter to 10.0% because some were fixed expenses that did not increase following sales. Bumble Bee to boost FY2016 profit by 66%yoy Current Price (B): 20.50 Target Price 2015 (B): 26.00 Upside : 26.8% Dividend Yield : 2.6% Total Return : 29.4% Market Cap. (Bm) : 97,822 CG Score: Technical Chart We project TUF's net profit to jump by 16.7%yoy in 2015 and 65.8%yoy in 2016. In 2015, consolidated net profit from Bumble Bee will be recognized in 4Q15, B1.4bn one-time expense from the acquisition will be booked, and 702 million new shares (14.7% of its current total shares) will be issued for the acquisition. Therefore, FY2015 EPS growth is projected at only 1.9%yoy. However, TUF's earnings are expected to leap 65.8%yoy in 2016 after all negative factors have been booked in 2015. As a result of the capital increase for the Bumble Bee acquisition, TUF's interest bearing debt/equity is projected at 1.34x in 2015 and 1.29x in 2016, still in line with the company's policy of maintaining the ratio near 1x. Way undervalued. 2016 P/E ratio only 11x We recommend buying TUF. As a global play, it will not be impacted by domestic economic slowdown. 2015 fair value (DCF, WACC of 7.34%) is B26.00; 2016 P/E ratio is anticipated at only 11x, lower than over 20x of international food stocks; more than 29% upside (dividend yield included) can be expected. ASP vs IAA consensus ASP 2015F 1.09 2016F 1.80 EPS (B) Cons 1.40 1.64 % diff -22% 10% Source: IAA consensus and ASP Key Data FY: Dec 31 Net Profit (Bm) Norm Profit (Bm) EPS (B) PER (x) Dividend Yield (%) ROE (%) BVS (B) PBV (x) EV/EBITDA (x) FY13A 2,853 2,853 0.62 33.0 1.8% 7.3% 8.61 2.4 18.7 FY14A 5,092 5,092 1.07 19.2 2.7% 11.6% 9.15 2.2 13.8 FY15F 5,944 7,344 1.09 18.9 2.6% 13.7% 11.36 1.8 16.4 FY16F 9,854 9,854 1.80 11.4 4.4% 15.1% 12.26 1.7 10.4 FY17F 10,083 10,083 1.84 11.1 4.5% 14.9% 13.18 1.6 9.8 Usanee Liurut License No.: 017928 [email protected] Anakepong Putthatibal Analyst Assistant Source : ASP Research This report is a rough translation of one of our Thai-language research products. It is produced primarily with time efficiency in mind, so that English-reading clients can see what the main recommendations are from our Thai-language research team. Given that this is a rough-and-ready translation, Asia Plus Securities pcl cannot be held responsible for translation inaccuracies.) The reports and information contained herein are compiled from public data sources and our analysts' interviews with executives of listed companies. They are presented for informational purposes only and not to be deemed as solicitations to buy or sell any securities. Best attempts have been made to verify information from these vast sources, but we cannot guarantee their accuracy, adequacy, completeness and timeliness. The analyses and comments presented herein are opinions of our analysts and do not necessarily reflect the views of Asia Plus Securities. Strong net profit rebound projected in 1Q15. Two M&A deals fully recognized We estimate TUF’s 1Q15 net profit at B1.1bn, growing 61.5%qoq and 18.7%yoy. Total sales are projected at B33bn, rising 2.1%qoq and 19.7%yoy, thanks to consolidation of its financial statement with MerAlliance and King Oscar (TUF holds 100% stake) for a full quarter (in 4Q14, earnings of the two subsidiaries were recognized only two months). Overall, consolidated net profit from the subsidiaries is estimated at B90m in 1Q15. In addition, a low tuna raw material price of US$1,200/ton on average in 4Q14, down as much as 23.9% from 3Q14, will fully benefit profitability of TUF’s tuna business in this quarter because its average product price is almost the same, making gross margin in 1Q15 increase to 15.0%. SG&A/sales would drop slightly from 10.3% in the previous quarter to 10.0% because some were fixed expenses that did not increase following sales. Bumble Bee to boost FY2016 profit by 66%yoy We project TUF's net profit to jump by 16.7%yoy in 2015 and 65.8%yoy in 2016. EPS growth is expected at only 1.9%yoy in 2015, but projected to leap 65.8%yoy in the next year. In 2015, US$250m or B7.5bn consolidated net profit from Bumble Bee will be recognized in 4Q15, B1.4bn one-time expense from the acquisition initially expected in 2016 (2.8% of TUF's total acquisition value, based on MWB acquisition that made up 2.8% of total acquisition value) will be booked, and 702 million new shares (14.7% of its current total shares) will be issued for the acquisition at the price of B18.80 (15% discount from TUF's February average price of B22.12). The new shares are expected to raise TUF's capital by B13.2bn or 26.5% of total Bumble Bee acquisition expense; another B36.6bn or 73.5% will come from borrowing. TUF's net profit is projected to leap 65.8%yoy in 2016 because negative factors would have been booked in 2015 and consolidated net profit from Bumble Bee will be recognized for a full year in 2016; TUF is expected to book US$1bn from Bumble Bee. As a result of the capital increase for the Bumble Bee acquisition, TUF's interest bearing debt/equity is projected at 1.34x in 2015 and 1.29x in 2016, still in line with the company's policy of maintaining the ratio near 1x to keep its payout ratio above 50% for the next three years. After the acquisition of MW Brand in 2014, interest bearing debt/equity surged above 2x, so the company delayed its dividend payment for almost two years. 1Q15 Earnings Forecast Bm 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15F % QoQ % YOY Total Sales 29,464 30,788 27,948 30,258 30,423 32,772 33,466 2.1% 19.7% Cost of Sale & Services (25,379) (26,812) (23,791) (25,373) (25,177) (28,041) (28,446) 1.4% 19.6% Gross Profit 4,085 3,976 4,158 4,885 5,246 4,731 5,020 6.1% 20.7% SG&A (2,591) (2,864) (2,715) (2,848) (3,084) (3,384) (3,347) -1.1% 23.3% Normalized Profit 1,494 1,112 1,443 2,037 2,162 1,348 1,673 24.2% 16.0% (406) (521) (474) (574) (152) (473) (460) -2.7% -3.0% Net Profit 1,004 815 950 1,522 1,922 698 1,128 61.5% 18.7% EPS (B) 0.22 0.18 0.20 0.32 0.40 0.15 0.24 61.5% 18.7% Gross Margin (%) 13.9% 12.9% 14.9% 16.1% 17.2% 14.4% 15.0% SG&A / Sales (%) 8.8% 9.3% 9.7% 9.4% 10.1% 10.3% 10.0% Net D/E Ratio 0.92 0.92 0.83 0.80 0.80 0.85 0.85 Financial Cost Source : Financial Statement / ASP Research Global Tuna Price Profitability by Quarter Bm ล านบาท US$/ton 2,500 2,000 40,000 21% 35,000 18% 30,000 15% 25,000 12% 20,000 1,500 9% 15,000 Sales 3Q14 1Q14 3Q13 3Q12 1Q12 3Q11 1Q13 Net margin Source : Financial Statement / ASP Research Revenue Structure Key Risks 1. THB/US$ appreciation – Under the assumption of THB33/US$, every B1 appreciation would lower TUF's FY2015 earnings and fair value by 3.3% and 4.5% from the current forecast, respectively. Value-added product 15% Pet food 7% Tuna 44% Salmon 4% Sardine & Mackerel 6% Shrimp feed 2% Frozen shrimp 22% Source : TUF Gross margin 1Q14F Jul 14 Source : TUF Jan 15 Jan 14 Jul 13 Jan 13 Jul 12 Jul 11 Jan 12 Jul 10 Jan 11 Jul 09 Jan 10 Jan 09 Jul 08 Jan 08 Jul 07 Jan 07 - 1Q11 0% 3Q10 3% 0 1Q10 5,000 3Q09 6% 1Q08 500 10,000 1Q09 A vg 2555 = 2,127 A vg 2556 = 1,956 A vg 2557 = 1,361 3Q08 1,000 2. Lower-than expected gross margin – Under the assumption of 15.7% gross margin, every 1% decrease in gross margin would depress TUF's FY2015 earnings and fair value by 25.3% and 34.6% from the current forecast, respectively. Source : ASP Research 2015-2017F Key Earning Forecast Profit / Loss (Bm) 31-Dec Statement of Cash flows (Bm) 31-Dec 2014 2015F 2016F 2017F 121,402 171,600 209,418 225,181 Cost of Sales (102,382) (144,578) (173,359) (185,350) Gross Profit 19,020 27,022 36,059 39,832 Adjustments to reconcile net profit Selling and Admin. Expense (12,031) (15,444) (19,895) (22,518) Depreciation & Amortize (1,673) (2,496) (3,726) (4,568) - - - - Increase / Decrease from Operating activities Cash flows from operating - net Sales Interest Expense Other Expense Other Income Net Profit Unrealised Profit / Loss from FX 886 500 500 500 Net Profit before tax 6,523 9,821 13,177 13,485 Income Tax (1,040) (1,277) (2,306) (2,360) Cash flows from Investing Net Profit before Extra Items 4,808 7,262 9,784 10,012 Increase / Decrease from long-term investments Profit / Loss for FX 284 82 71 71 Increase / Decrease from investment in Related Companies Other Extra Items - (1,400) - - Increase / Decrease from Fix Asset 5,092 5,944 9,854 10,083 1.07 1.09 1.80 1.84 4,808 7,262 9,784 10,012 1.07 1.34 1.80 1.84 Net Profit EPS Operating Profit Norm EPS Others Cash flows from Investing - net Others 7.61% 41.35% 22.04% Net Profit Growth (%) 78.47% 16.74% Gross Profit Margin (%) 15.67% 15.75% 4.19% 3.46% Net Profit Margin (%) 7.53% Increase / Decrease Capital & Premium on ordinary shares 65.78% 2.32% Decrease dividend expense 17.22% 17.69% 4.71% 4.48% Quarterly Profit / Loss (Bm) 2015F 2016F 2017F 5,092 5,944 9,854 10,083 2,518 2,185 3,213 3,213 - - - (1,138) (5,892) (8,520) (4,223) 9,276 3,557 5,674 10,224 (3,267) (9,149) (4,000) (4,000) (0) (49,831) - - - - - (589) (3,203) 229 9 - - (8,691) (54,939) (4,000) (4,000) 5,304 45,719 496 2,130 Cash flows from financing activities Increase / Decrease Loan Sales Growth (%) 2014 Cash flows from operating (652) - - - - 15,529 - - (2,398) (2,972) (4,927) (5,041) Cash flows from financing activities - net 1,022 58,276 (4,432) (2,911) Increase / Decrease - Net Profit 1,607 6,894 (2,758) 3,313 2017F Balance Sheet (Bm) 1Q14 2Q14 3Q14 4Q14 31-Dec 2014 2015F 2016F Sales 27,948 30,258 30,423 32,772 Cash & Cash equivalents 2,123 9,017 6,259 9,572 Cost of Sales (23,791) (25,373) (25,177) (28,041) Trade accounts receivable 15,404 14,300 17,452 18,765 Gross Profit Selling and Admin. Expense Interest Expense Other Income Net Profit before tax 4,158 4,885 5,246 4,731 Inventories 37,518 52,209 62,602 66,932 (2,715) (2,848) (3,084) (3,384) Property, Plant & Equipment - net 23,052 29,977 30,726 31,474 (474) (574) (152) (473) 115,443 188,804 199,457 209,820 163 157 168 398 Total Asset 1,151 1,728 2,300 1,345 Trade accounts payable 10,725 18,072 21,670 23,169 Income Tax (302) (158) (297) (283) Other Current Liabilities 10,951 11,463 12,008 12,588 Net Profit before Extra Items 695 1,381 1,789 942 Borrowing 46,300 92,019 92,514 94,644 Profit / Loss for FX 254 141 133 (244) Total Liabilities 67,976 121,554 126,193 130,402 MI (154) (189) (214) (119) Net Profit 950 1,522 1,922 698 MI 3,802 5,083 6,170 7,283 Paid-up Capital 1,193 1,368 1,368 1,368 Share Premium 19,948 35,302 35,302 35,302 Retained earnings Sales Growth (YoY) 14.35% 7.61% 3.26% 6.45% Legal reserve 120 120 120 120 Net Profit Growth (YoY) 40.79% 323.89% 91.41% -14.34% Unappropriate 21,527 24,499 29,426 34,467 Gross Profit Margin 14.88% 16.14% 17.24% 14.44% Shareholders' Equity 3.40% 5.03% 6.32% 2.13% Liabilities & Shareholders' Equity 31-Dec 2014 2015F 2016F 2017F 31-Dec Current Ratio (x) 1.51 1.34 1.28 1.34 Net Profit Margin Key Financial Ratio Account Receivables Turnover (day) Inventory Turnover (day) Account Payable Turnover (day) Net Debt / Equity (x) ROAE (%) 43,665 62,167 67,094 72,135 115,443 188,804 199,457 209,820 Key Assumptions 44 30 30 30 132 130 130 130 36 45 45 45 1.01 1.34 1.29 1.18 11.6% 13.7% 15.1% 14.9% Tuna Quantity Sold (Tons) Shrimp Quantity Sold (Tons) Tuna Price (USD/ton) Shrimp Price (Baht/kg.) Foreign Exchange Rate (THB/USD) 2014 2015F 2016F 2017F 308,931 365,304 383,569 402,747 58,079 81,292 85,357 89,625 1,361 2,000 2,000 2,000 212 170 170 170 32.48 33.00 33.00 33.00
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