Maybank Ups TU’s Target Price to ฿20.60 as Operation Tends to Recover in 3Q18

Maybank Kim Eng Securities recommends “BUY” Thai Union Group Public Company Limited (TU)’s shares by stepping up the 12 months target price from ฿19.00/share to ฿20.60/share (Average PER of 17.5x).

 

Regarding the higher price adjustment, TU’s operating results tend to recover in 3Q18 as gross margins rise on lower tuna raw material costs. Even net profit will be pressured by a loss on asset impairment due to the closure of a salmon plant, the profitability of the salmon business will recover after this. Maybank sees improving operations while the two major issues have been addressed including the court case of Chicken of the Sea and the loss-making salmon in Scotland.

 

The increase of 3Q18 gross margin
3Q18 normalized profit is forecast at 1.44 billion baht, down 10% YoY (year over year), due to an absence of FX (foreign currency) gain like in 3Q17, but profit should rise 17% QoQ (quarter on quarter) due to high season.

The gross margin is projected to increase to 14.7% from 13.8% in 2Q18, benefiting from the average tuna price in 3Q18 dropped 12% QoQ and 27% YoY to USD1,467/ton, as well as sale volume increases and selling price adjustment of tuna brand in Europe.

 

Record impairment loss of salmon plant in Scotland
TU will shut down the Edinburgh Salmon Company (ESCo) in Scotland, which has continued to suffer losses, with a loss of around 200 million baht in 2016. The plant’s utilization rate has declined due to losing its main customers. ESCo, contributing 1% of TU sales, is one of MerAlliance’s European manufacturers of smoked salmon (OEM).

The other two MerAlliance plants in France and Poland are profitable. The closure of ESCo may cause TU to record impairment losses on assets (fixed assets and goodwill) of 500 million baht in 3Q18, resulting in a net profit of 1.04 billion baht, up from 10 million baht in 2Q18 and drop 40% YoY.

 

Recovering tendency of operating results
TU’s performance should improve continuously as a result of declining tuna prices and more stable trend. Salmon business should see improving margin after the closure of the loss-making plant. TU managed to address both issues in 2Q18 and 3Q18, including the provision of legal expenses from antitrust lawsuits and other cases of Chicken of the Sea worth 44 million baht and asset impairment of ESCo.

 

Tuna and raw material prices will tend to rise significantly along with strong baht, but selling prices are not adjustable. Strong Baht. Raw material prices rise, but selling prices are not adjustable and weaken red lobsters.