TRIS Rating has affirmed the company and senior unsecured debenture ratings of Thai Union Frozen Products PLC (TUF) at “AA-”. TRIS Rating has also removed the CreditAlert with “developing” implication of TUF. 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 TUF’s latest move to acquire 100% of the equity of Bumble Bee Holdco S.C.A. (Bumble Bee). These factors are partially offset by the inherent volatility of TUF’s raw material prices, the industry’s exposure to the effects of disease outbreaks, fluctuations in foreign exchange rate, and changes in the regulatory frameworks regarding trade barriers, and the fishing industry around the world. The rating affirmation removes the CreditAlert with “developing” implication placed on TUF’s company rating and issue ratings since 23 December 2014. The CreditAlert was issued following TUF’s announcement on 19 December 2014 that it intended to acquire 100% interest in Bumble Bee for the base purchase price of US$1,510 million.
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 amidst the volatile tuna and shrimp prices as well as the looming challenges from trade and non-trade regulations. A rating upgrade would be likely if TUF can smoothly integrate Bumble Bee's operations and demonstrates its ability to make sustained improvement in its financial profile. A downgrade could occur should the group’s operating performances be significantly weaker than expected, resulting in a weaker capital structure and deteriorating cash flow protection for longer period.
TUF was incorporated in 1988 by the Chansiri family. The company is one of the leading seafood companies in the world. Its product lines cover tuna, shrimp, sardines, salmon, pet food, and more. In 2014, tuna products generated 44% of the company’s total revenue. Shrimp and shrimp-related products were the second-largest portion of total revenue (24%), followed by pet food (7%), sardines and mackerels (5%), salmon (5%), and value added and other products (15%).
Currently, TUF is the world’s largest producer of canned tuna. The company produces about 300,000 tonnes of tuna per annum, approximately 18% of the 1.7 million tonnes of canned tuna produced worldwide. TUF’s production bases are geographically diversified spread across seven countries in five continents. The main production facilities for TUF and its affiliates are located in Thailand, the US, Ghana, and the Seychelles islands. TUF also has production facilities in Vietnam, France, and Papua New Guinea. TUF’s major market is the US, which comprised 44% of total revenue in 2014. Sales to European markets accounted for 29% of total revenue, followed by sales in Thailand (7%) and Japan (7%).
In 2014, TUF, through its subsidiaries, acquired MerAlliance SAS (MerAliance), the fourth largest smoked salmon producer in Europe and King Oscar AS (King Oscar), a well-known branded premium sardine producer. During the first quarter of 2015, TUF’s subsidiary in the US also acquired the asset of Orion Seafood International (Orion), the world’s largest supplier of lobster products. These acquisitions are in line with TUF’s strategy to strengthen its core business categories as well as to expand into new markets with new products.
Despite facing volatile tuna prices and ongoing early mortality syndrome (EMS) outbreak in the shrimp segment, TUF’s operation in 2014 improved significantly from the low level in 2013. Revenue grew by 7.6% year-on-year (y-o-y) to Bt121,402 million, due mainly to the growth in the shrimp, salmon, pet food, and value-added product segments. TUF also benefited from the depreciation of Thai baht against the US dollar. Shrimp remained in tight supply due to the EMS outbreak in several countries including Thailand. Nevertheless, TUF’s US subsidiary has a strong global sourcing network so it could source raw materials from EMS-free countries. TUF’s gross margin improved from 12.6% in 2013 to 15.7% in 2014. The branded tuna products segment recorded a good performance and the pet food segment recovered after undertaking a restructuring during 2014. TUF’s operating margin (operating income before depreciation and amortization as a percentage of sales) climbed from a record low of 5.5% in 2013 to 7.8% in 2014. Earnings before interest, tax, depreciation, and amortization (EBITDA) soared by 37% y-o-y to Bt10,715 million in 2014. The company’s cash flow protection improved. The EBITDA interest coverage ratio was 6.4 times in 2014, compared with a range of 4-4.7 times in 2011-2013. The funds from operations (FFO) to total debt ratio was 17.7% in 2014, compared with a range of 15.4%-24.4% in 2011-2013.
During the first quarter of 2015, TUF faced challenges from lower prices for tuna and shrimp. The average price of raw tuna continued to drop, reaching a five-year low of US$1,010 per tonne in March 2015. The shrimp price also slumped. The average shrimp price slid from Bt218 per kilogram (kg.) in 2013 and Bt223 per kg. in 2014 to Bt192 per kg. in the first quarter of 2015. Moreover, a steep depreciation of the euro against the Thai baht cut the revenues from TUF’s European subsidiaries once the revenues were translated into Thai baht. In the first quarter of 2015, TUF’s total revenue increased slightly, up by 2.4% y-o-y to Bt28,606 million. Revenue rose because TUF sold more salmon, shrimp, sardines, and mackerel, despite drops in tuna sales volume and tuna selling prices. The drop in shrimp prices worldwide cut TUF’s profit margin. The gross margin declined to 13.8% in the first quarter of 2015, compared with 14.9% during the same period of 2014. The operating margin weakened to 5.5% in the first quarter of 2015, compared with 7.3% during the same period of 2014.
In December 2014, TUF announced a 100% acquisition of Bumble Bee for the base purchase price of US$1,510 million (equivalent to Bt49,830 million at Bt33/US$). This transaction is under the US antitrust review. The acquisition is expected to be completed in the fourth quarter of 2015. To finance this transaction, TUF’s board of directors and shareholders approved a capital increase. TUF aims to obtain up to US$400 million (equivalent to Bt13,200 million) in new equity capital. The remainder (US$1,110 or Bt36,630 million) will be financed by debt. After the Bumble Bee acquisition, TUF’s debt to capitalization ratio is expected to hover around 55%, up from 46.5% as of March 2015. TUF plans moderate capital expenditures of Bt3,500-Bt4,000 million per year in 2015-2017. Given expected EBITDA of Bt14,000-Bt16,000 million per year after the full consolidation with Bumble Bee, debt to capitalization ratio and cash flow protection are expected to improve to its normal level within the next one to two years.
Bumble Bee is the second-largest tuna producer in the US and the market leader in shelf-stable seafood in Canada. The acquisition of Bumble Bee is in line with TUF’s long-term strategy of adding more branded seafood products to its portfolio. After the post-merger integration is completed, TUF’s product mix will shift towards more high-margin branded products with stronger market position in North America. TUF expects it will realize some synergies with Bumble Bee, in terms of supply/processing, cost saving, innovation sharing, as well as operational efficiencies.
In April 2015, the European Commission issued yellow card to put Thailand on formal notice for not taking sufficient measures in the international fight against illegal, unreported and unregulated (IUU) fishing. Thailand will be given six months to implement a corrective action plan. Should the situation not improve, the EU could resort banning fisheries imports from Thailand. Under the worst case scenario, the EU ban is expected to have limited impacts on TUF’s business since approximately 7% of TUF’s total revenue came from exports to the EU.
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