Shares of Thai Union recommended a ‘buy’ as investors run for cover on concerns of impact on EU operations

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Shares of Thai Union Group Plc (TU), the world’s leading tuna producer, are still being recommended as a ‘buy’ as its shares are being sold amid concerns about the company’s impact from the ongoing energy crisis in Europe and onset of a global recession.

The continued decline in the shares which are currently trading at lows that are prompting many to view this as a buying opportunity as the maker of Select tuna and Chicken of Seas, is seen as a safe haven during bad economic times.

Shares of TU were trading at 16.60 Baht a share on Friday down slightly over the past 1-month from the highs of 18 Baht a share with the trend indicting that the shares may continue to slide as concerns over its European operations continues to remain spook investors.

TU, which derives about 28% of its 142 billion Baht revenues from its operations in Europe, has seen a sharp sell off as investors remain concerned about the impact of the gas supplies to Europe becomes a big concern as winters approach.

The war between Russia and Ukraine and the follow up sanctions from Europe prompted Russia to decide to cut of some of the gas supplies citing ‘repairs’ to the Nord Stream 1.

The cut in gas supplies has prompted prices of gas to surge to levels not seen in decades and in process prompted a sell off in stocks that have large operations in EU, prompting TU to be among the stocks being sold on the market.

“The reason that TU shares slipped 1.78% against the backdrop of the Thai Baht weaking to 16-year low was because market still has concerns about recession in EU, coupled with the rising energy price that effect consumer’s purchase power,” Naree Apisawaittakan analyst at Philip Securities (Thailand) Plc said.

Naree says that the likelihood of such a situation happening is limited as TU’s products are necessities and on the contrary a recessionary period is a period when cheaper food products such as tuna are consumed in larger quantities, adding that that drop in discretionary income would have very limited impact.

TU Share price performance in past 1-month

Better H2 Earnings

Analysts believe that the earnings for TU during the 2nd half of the year is likely to continue to remain strong.

“We model a 1.8 billion Baht core profit for Q3 2022, up 17% year-on-year (thanks to the eased cost inflation situation from lower prices of raw tuna and salmon, packaging and ingredients and freight in H2 2022) and 2% quarter-on-quarter (led by the third-quarter high season),” Prasit Sujiravorakul, analyst at Bualuang Securities said in a note to clients.

He said that although the raw tuna price may rise again in Q3 2022 due to the ban on the use of Fishing Aggregate Device (FAD), TU believes that it won’t exceed the comfort zone level of US$1,500-1,800/tonne.

Naree estimates that net profit of TU in Q3 2022 tends to continue to rise and that would be supported by more clearer price rise, decreasing promotional items which will reduce the effect from higher ingredients cost.

Capital Nomura securities estimate the normal profit of Q3 2022 at 1.83 billion Baht growing 18% from last year and 5% from previous quarter.

Nomura sees that TU was likely to see a high season which would increase its sales compared to both last year and last quarter. This would be further boosted by the rise in selling price and sales volume.

And estimate that TU’S gross profit margin during Q3 2022 tends to rise when compared to last year and last quarter from weakening Thai Bath, higher value products and pet food sales increase.

TU will also likely see some boost from the lower losses of its United States business of Red Lobster from last quarter due to seasonal factors.

Yuanta Securities provided more information saying that TU’s performance in Q3 2022 tends to rising from last quarter as its business entered its high season.

This may cause sales to show a trend of increasing and also TU begins to see its tuna cost decreasing and shipping cost starts to decrease.

Finansia Syrus securities indicated that TU cost start to decrease in the 2nd half of the year from tuna price that decreased by about 6% from last quarter. While global aluminium market price continues to weaken, average during Q3 2022 was at US$ 2,400/ton decreasing 9% from last year and 17% from last quarter as a first quarter that decreased form last year since the pandemic.

This was helped by a drop in freight container and the trends continue to show that it is slipping.

Increasing Efficiencies

Krungsri Securities said that TU was moving forward with investing in changing cost efficiency and automation system. The aim is to adjust conversion cost 3% in each year during 2022-2025 especially for factory in Thailand. However, they expect that conversion cost that decrease 3% will increase gross profit margin at 05 ppt.

Naree of Phillip securities said that they have adjusted the estimated net profit of TU up by 13% to 7.1 billion Bath.

“Gross margin to exceed 17.5% in H2 2022 (or higher than H1 2022), driven by sustained strong pet care gross margin and improved ambient and frozen seafood operations in H2 2022. For 2022, it lifted the sales growth target from 7-8% to 10-12% but maintained the same gross margin target at 17.5-18%,” Prasit of Bualuang said.

Nomura has said that it expects profits to be 6.6 billion Bath a drop from the just over 8 billion Baht it reported last year.

Meanwhile Finansia Syrus securities estimate TU’s 2022 net profit at 6.18 billion Bath, and Yuanta Securities estimate TU’s 2022 net profit at 6.1 billion Bath.

BUY Rating

Most brokers are still recommending ‘buy’, even if TU profit in 2022 is set to decrease from last year. But performance of second half of the year tend to be a beginning of the recovery.

They target the average price at 21.34 Bath/share.

Broker                                                Target Price

  • Finansia Syrus securities                    24.59 Bath/share
  • Phillip Securities                                 22.70 Bath/share
  • Bualuang Securities                            22.50 Baht/share
  • Yaunta Securities                                20.50 Bath/share
  • Kiatnakin Phatra Securities                20.30 Baht/share
  • Krugsri Securities                               20.00 Bath/share
  • Capital Nomura Securities                  19.00 Bath/share

Even if the net profit of 2022 was showing a tend to decrease but if considering from last year profit at 8 billion Bath it in a higher than a normal time when the company used to have profit of around 3-5 billion Bath.

Nevertheless, analyst estimates that TU net profit in 2023 will be able to grow from those that it will record in 2022 by around 22%.

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