Thai Union Frozen Shares: Still Not A Good Catchff

TUF’s share price has dropped roughly 17% in the past three months and has made its already attractive valuation even more enticing for bottom fishers. Trading at an estimated PE08 of 8.5x and providing a estimated dividend yield of roughly 5.6%, the company’s share price is one of the cheapest tuna canneries in the region.

Although we don’t really see much downside risk from here, there is also no positive near-term catalyst that will support a re-rating in the short term. In addition, apart from better 4Q07 earnings (which is a seasonal normality anyways) JTEPA and the US dropping anti dumping tariffs on shrimp, in which the positive impact will gradually to be realized, there is really nothing new. Furthermore the same factors, namely high tuna raw material prices, currency appreciation, and relatively high oil prices, which had an adverse impact on 2007 earnings are still there, so it is unlikely that earnings growth will be strong in 2008 (unlikely to grow double digit).

As a result, a Neutral rating on the counter is maintained with a revised target price of Bt25.00 (from Bt26.50). Baht/US$ FX assumptions were adjusted from Bt35/US$1 to Bt33/US$1 and average WPO raw tuna prices up from US$985/ton to US$1,200/ton from 2008 onward.

2008 outlook remains highly uncertain and volatile unlike the market consensus view (also in line with management view that gave an earnings guideline of roughly 2008 total revenue of US$1.8bn up 10% to 11% revenue growth from 2007) which views the earnings recovery in 2008 a cautious view is maintained on the company’s earnings prospects this year mostly due to the following same old reasons i) High raw tuna material prices: Given the supply conditions resulting from over fishing and global warming, we do not see raw material prices coming down anytime soon (currently US$1,500/ton). Moreover, prices are likely to remain above US$1,000/ton and possibly higher, which would further suppress longer-term margins.

ii) Currency and competition concerns: Given the current weakness of the US dollar and the gradual appreciation of the baht, continued pressure on the company’s sales in baht terms is foreseen. If the baht continues to strengthen then prices (especially shrimp) will not be as competitive as Vietnam, China, or Ecuador.

iii) High oil prices maintained: Although oil prices have recently dropped below US$90/barrel, the average oil price for 2008 is anticipated to be higher than 2007 and should remain a cost pressure.

iv) US slowdown concerns: Concerns about the US economy will make it more difficult to pass on prices, thereby limiting upside growth in US dollar sales, which are still roughly 55-60% of the company’s total sales.

Raw tuna and baht assumptions have been revised as follow: i) Baht/US$ FX assumptions from Bt35/US$1 to Bt33/US$1 and ii) average WPO raw tuna prices up from US$985/ton to Us$1,200/ton from 2008 onwards. Sales and earnings forecasts for 2008 were slightly impacted (immaterial due to the increased sales from expansion and better terms of trade). However, 2009 sales and earnings were revised down by 8.5% and 9.8%, respectively, to reflect the underlying structural uncertainty. As a result a DCF target price is revised down to Bt25.00 (from Bt26.50).

Despite an uncertain outlook in 2008, the company’s valuation is still attractive at this level. In addition, the company provides an attractive estimated annual dividend yield of 5.6%. Therefore, despite risks and an unchanged outlook, a Neutral on the counter is reiterated with a new target price of Bt25.00 (WACC of 9.8% and terminal growth rate 3%). The current share price offers an implied upside of 22% to target.

Source: KGI Securities (Thailand)