Source: The Nation
Investment thesis
TUF remains our sector top pick, premised on earnings sustainability. We expect solid 3Q12 profit growth and sustained momentum into 4Q12. In FY13, bottom-line expansion will be led by the US pet food unit, a new shrimp plant, sales price increases for COSI products and synergy-building with Pakfoods. We have rolled over our investment horizon to YE13 and arrived at a new target price of Bt94.
3Q12 should be the best quarter so far
We estimate a Bt1.7bn net profit for 3Q12, up by 9% YoY and 70% QoQ. Stripping out FX and Bt407 million in one-off financing expenses related to a €250 million loan prepayment in 2Q12, core profit would be Bt1.5bn, up by 4% YoY and 7% QoQ. The expected QoQ rise is due to seasonality. The YoY increase was led by sales growth, sustained gross margin (GM) and a significant interest expense reduction of Bt150 milion/quarter as a result of the loan prepayment.
We expect a slightly softer GM—16.5% against 16.9 percent for 2Q12 and 17.3 percent for 3Q11—because of a stronger baht, lower YoY shrimp production following the February fire at one of TUF’s shrimp plants—100 tons/day against a 120 tons/day normal run rate—and higher raw shrimp costs. A new shrimp plant will start operating in early 2013.
Strong 3Q12 top-line growth
We estimate a 3Q12 revenue increase of 13% YoY and 6% QoQ, bolstered by tuna sales price increases (except for COSI products) and greater sardine sales volume. Shrimp sales are likely to post another drop, due to lower output, noted above.
Sustained GM of 17% in 4Q12
Management guides that GM will be sustained at 17% in 4Q12 on frequent sales price increases for tuna products. The firm will also reduce the scale of discounts offered to customers.
Substantial contribution from US pet food unit in FY13
The 2H12 bottom-line contribution of the US pet food unit will be insignificant because of start-up costs and low initial production volumes. Management wants to guarantee a premium quality product. Hence, the pet food factory’s run rate is currently only about 50%. TUF targets FY12 sales of below USD 100 million from the unit, then USD 200 million in FY13. We expect a very high margin of 20-30 percent from this business, which should boost overall FY13 GM to above 17%.