TRIS Rating has affirmed the company and senior debenture ratings of Thai Union Frozen Products PLC (TUF) at “AA-”. At the same time, TRIS Rating has assigned a rating of “AA-” to TUF’s proposed issue of up to Bt8,250 million in senior debentures. The outlook remains “stable”. The proceeds from the new debentures will be used to refinance TUF’s long-term debentures and to finance working capital requirements and planned capital expenditures. The ratings reflect TUF’s strong market position as one of the world’s leading tuna processors, the diversity of its products and markets, and the group’s well-known brands in Europe and the United States (US). The ratings also take into consideration the inherent volatility of TUF’s raw materials, the industry’s exposure to the effects of disease outbreaks, and changes in the regulatory frameworks regarding import tariffs and fishing around the world.
The “stable” outlook reflects TRIS Rating’s view that TUF will continue to maintain its competitive advantage through economies of scale and production efficiency. The company’s diversified base of markets and products will help stabilize its revenue streams during the volatile periods of tuna and shrimp products. The company is expected to maintain its financial discipline to keep leverage at moderate level amidst the challenging industry environment.
TUF was incorporated in 1988 by the Chansiri family. The company is one of the leading seafood companies in the world. Its products cover tuna, shrimp, sardines, salmon, pet food, and others. For the first nine months of 2013, tuna products generated 49% of total revenue. Shrimp and shrimp-related products were the second-largest portion of total revenue (24%), followed by pet food (7%), sardines and mackerels (6%), and other products (14%).
Currently, TUF produces about 300,000 tonnes of tuna per annum, almost one fifth of the 1.6-1.7 million tonnes of canned tuna produced worldwide. TUF’s production bases are geographically diversified in seven countries, covering five continents. The main production facilities for TUF and its affiliates are located in Thailand, the US, Ghana, and the Seychelles. TUF also has production facilities in Vietnam, France, and Papua New Guinea. In terms of market, TUF’s major market is the US, which represented 40% of total revenue in the first nine months of 2013. Sales to European markets accounted for 30% of total revenue, followed by sales in Thailand (8%) and Japan (7%).
During the first nine months of 2013, TUF’s performance was hurt by the volatile tuna prices and the early mortality syndrome (EMS) outbreak in shrimp farming in Thailand. Volatilities in tuna prices delayed tuna orders from some customers in the contract manufacturing segment. However, increasing sales in the branded tuna segment, which accounts for about 50% of the total volume of tuna sold, helped stabilize total tuna sales. The EMS outbreaks lowered sales volume of TUF’s shrimp feed by 30% and also cut frozen shrimp sales volume of Thailand operation by 18.7% during the first nine months of 2013. However, TUF was able to record a 9.1% increase in the volume of frozen shrimp products sold during the first nine months of 2013. The rise was due to healthy growth in the shrimp market in the US. In addition, TUF has completed the acquisition of Pakfood Co., Ltd. (PPC) and consolidated PPC into the group since March 2013. As a result, total revenue in the first nine months of 2013 inched up to US$2,694 million, a 4.4% year-on-year (y-o-y) rise compared with the same period of the previous year.
TUF’s profitability deteriorated during the first nine months of 2013, but the figures improved quarter by quarter. The profit margin was hurt by the volatility of tuna prices and the skyrocketing costs of shrimp after the EMS outbreak. After reaching US$2,325 per tonne in March 2013, raw tuna prices plummeted to US$1,875 per tonne in September 2013 and further down to US$1,400 per tonne in December 2013. TUF’s operating margin, defined as operating profit before depreciation and amortization, weakened to 5.5% in the first nine months of 2013, while its operating margin during 2008-2012 ranged from 5.6% to 9.2%. However, TUF’s operating margin in the third quarter of 2013 improved to 7.1% from a low of 3.8% in the first quarter of 2013. The recovery in the operating margin was due to the price adjustments for shrimp products to reflect rising shrimp costs. The improved margin of branded tuna products also rose as raw material costs declined. Earnings before interest, tax, depreciation, and amortization (EBITDA) in the third quarter improved by 23% from the second quarter of 2013 to Bt2,217 million, close to TUF’s normal EBITDA per quarter of Bt2,500 million. The EBITDA interest coverage ratio recovered to an acceptable level at 5.5 times in the third quarter of 2013.
As of 30 September 2013, TUF’s debt to capitalization ratio weakened, but remained acceptable at 49%. TUF decided to lower its capital expenditure plan from Bt6,000 million per year in 2013-2015 to about Bt3,500-Bt4,500 million in responding to business uncertainty. Looking forward, TRIS Rating expects the recovery of tuna demand, particularly from the contract manufacturing segment, after tuna prices declined to the three-year lowest level of US$1,400 per tonne in December 2013. Baht depreciation should partly help improve profitability in the short term. The EMS problem in shrimp industry is expected to ease gradually and the shrimp supply is expected to increase by 20%-25% in 2014. Because capital expenditures have been reduced, TUF’s cash flow protection and its debt to capitalization ratio should improve to normal levels in the near future.
TRIS Rating Co., Ltd./www.trisrating.com Contact: santaya@trisrating.com, Tel: 0-2231-3011 ext 500/Silom Complex Building, 24th Floor, 191 Silom Road, Bangkok 10500, Thailand Copyright 2014, TRIS Rating Co., Ltd. All rights reserved. Any unauthorized use, disclosure, copying, republication, further transmission, dissemination, redistribution or storing for subsequent use for any purpose, in whole or in part, in any form or manner or by any means whatsoever, by any person, of the credit rating reports or information is prohibited. The credit rating is not a statement of fact or a recommendation to buy, sell or hold any debt instruments. It is an expression of opinion regarding credit risks for that instrument or particular company. The opinion expressed in the credit rating does not represent investment or other advice and should therefore not be construed as such. Any rating and information contained in any report written or published by TRIS Rating has been prepared without taking into account any recipient’s particular financial needs, circumstances, knowledge and objectives. Therefore, a recipient should assess the appropriateness of such information before making an investment decision based on this information. Information used for the rating has been obtained by TRIS Rating from the company and other sources believed to be reliable. Therefore, TRIS Rating does not guarantee the accuracy, adequacy, or completeness of any such information and will accept no liability for any loss or damage arising from any inaccuracy, inadequacy or incompleteness. Also, TRIS Rating is not responsible for any errors or omissions, the result obtained from, or any actions taken in reliance upon such information. All methodologies used can be found at http://www.trisrating.com/en/rating_information/rating_criteria.html.