TRIS Rating has assigned the rating of “AA-” to the proposed issue of up to Bt10,000 million in senior unsecured debentures of Thai Union Group PLC (TU). At the same time, TRIS Rating has affirmed the company rating and current senior unsecured debenture ratings of TU at “AA-”. The outlook remains “stable”. The assigned issue rating replaces the rating of the proposed issue of up to Bt6,000 million announced on 27 June 2016 as the company decided to increase the bond size. The proceeds from the new debentures will be used to repay TU’s existing debts and for planned capital expenditures. The ratings reflect TU’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). These factors are partially offset by the inherent volatility of raw material prices, exposure to the industry-wide effects of disease outbreaks, fluctuations in foreign exchange rates, and changes in the regulatory frameworks regarding trade barriers and the fishing industry around the world.
The “stable” outlook reflects the expectation that TU will sustain the strong operating performance and maintain its competitive advantage through economies of scale and production efficiency. The company’s diversified production bases, markets, and products will help stabilize its revenue streams despite the volatile prices of some products as well as the looming challenges from trade and non-trade regulations.
TU’s ratings and/or outlook could be upgraded if TU’s financial profile and its market position are strengthened. On the contrary, the ratings and/or outlook could be downgraded if TU’s operating performance or financial profile is significantly weaker than expected, resulting in a weaker capital structure and deteriorating cash flow protection.
TU was established in 1977 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 2015, tuna products generated 37% of total revenue. Shrimp and shrimp-related products were the company’s second-largest portion of total revenue (29%), followed by salmon (9%), pet food (7%), sardines and mackerels (6%), and value added and other products (12%).
TU 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. TU’s production bases are geographically diversified, spreading across seven countries on five continents. The main production facilities for TU and its affiliates are located in Thailand, the US, Ghana, and the Seychelles islands. TU also has production facilities in Vietnam, France, and Papua New Guinea. TU’s major market is the US, which accounted for 42% of total revenue in 2015. Sales in European markets accounted for 29% of total revenue, followed by sales in Thailand (8%) and Japan (6%).
TU posted strong operating results in 2015 even though the prices of tuna and shrimp products were low, and the euro underwent depreciation against the Thai baht. Thanks to recent acquisitions in other product lines, TU’s revenue grew by 3% year-on-year (y-o-y) to Bt125,183 million in 2015. TU’s profitability improved in all product segments, especially in tuna and shrimp operations in Thailand. Moreover, a successful turnaround of the pet food business in a US subsidiary supported TU’s earnings. However, TU incurred a one-off expense for fishing fleet impairment amounting to Bt508 million in 2015. Despite the impairment charge, the operating margin before depreciation and amortization was 7.6% in 2015, compared with 7.8% in 2014 and 5.5% in 2013. Earnings before interest, tax, depreciation, and amortization (EBITDA) amounted to Bt10,514 million in 2015, compared with a record high of Bt10,715 million in 2014 and Bt7,815 million in 2013.
During the first quarter of 2016, revenue was Bt31,257 million, a 9% up from the same period of 2015. The growth was driven by a strong performance of branded tuna in Europe, a spike in tuna prices which boosted private-label tuna sales, the ongoing improvement of the pet care segment, and a contribution from a recent acquisition, Rugen Fisch AG. TU also benefited as the Thai baht weakened against the euro and US dollar. TU’s operating profit margin remained strong, rising to 6.9% during the first quarter of 2016, compared with 5.5% during the same period of a year earlier. The rise was driven mainly from the tuna, shrimp, and pet food segments.
In December 2015, TU terminated the acquisition of Bumble Bee Foods, LLC (Bumble Bee). TU announced on 19 December 2014 it would acquire 100% of interest in Bumble Bee from Lion Capital with subject to approval under the US antitrust laws. The cancellation was announced because TU and Lion Capital concluded that the antitrust clearance was unlikely to come under the time stipulated in the Share Purchase Agreement.
TU’s leverage has improved significantly. Leverage fell because of TU’s strong operating performance, and better working capital management. At the end of March 2016, total debt declined to Bt36,094 million from Bt46,534 million in 2014. The total debt to capitalization ratio improved from 49.5% in 2014 to 42.3% as of March 2016. TU’s cash flow protection is satisfactory. The FFO to total debt ratio improved from 17.6% in 2014 to 21.5% in 2015 and 26.1% (annualized, from the trailing 12 months) during the first quarter of 2016. The EBITDA interest coverage ratio rose from 6.4 times in 2014 to 6.6 times in 2015 and 7.6 times in the first quarter of 2016.
Looking forward, TU’s performance is expected to improve in 2016, even though TU could be challenged by fluctuating tuna prices and outbreak of disease among salmon. TU’s earnings will be bolstered by three factors: good performance in the tuna segment in the European Union (EU), a recovery from an outbreak of early mortality syndrome (EMS) at shrimp farms in Thailand, and continued improvement in the pet care segment. During 2016-2018, under TRIS Rating’s base case scenario, TU’s revenue is expected to grow, ranging from Bt145,000-Bt180,000 million. The operating margin is expected to stay around 7.2%-7.5%. EBITDA is projected to range from Bt11,000-Bt14,000 million per annum. Despite pursuing a growth strategy, the company is expected to maintain its financial discipline. The total debt to capitalization ratio is expected to stay below 50%.
Sustainability and human trafficking issues remain the key challenges for the Thai seafood industry. Thailand has been placed a “yellow card” by the European Commission for not taking sufficient measures in the international fight against illegal, unreported and unregulated (IUU) fishing since April 2015. The Thai government is attempting to solve this problem. If the government fails to do so, Thailand will get handed a red card and will be banned from exporting fishery products to Europe. The effect of a red card will sting the Thai seafood industry, since fishery products including fish, shrimp, and cuttlefish, plus agro-industrial seafood, exported from Thailand to the EU nations was worth approximately Bt28,000 million in 2014 and Bt21,000 million in 2015. However, the impact of a “red card” on TU’s operating performance will be limited. TU has several overseas operations. The revenue derived from exports from Thailand to the EU comprises less than 2% of TU’s revenue.
Recently, Thailand was upgraded from Tier 3, the lowest ranking, to Tier 2 on the Watch List contained in the US Department of State's Trafficking in Persons (TIP) Report. The earlier downgrade to Tier 3 from Tier 2 Watch List did not trigger any trade sanctions or trade restrictions, an upgrade from Tier 3 to Tier 2 Watch List will not result in any significant effect on trade. However, the upgrade will help improve the image of seafood and fishery products from Thailand.
TU172A: Bt2,500 million senior debentures due 2017 AA- TU192A: Bt3,150 million senior debentures due 2019 AA- TU212A: Bt1,550 million senior debentures due 2021 AA- TU217A: Bt1,500 million senior debentures due 2021 AA- TU242A: Bt1,050 million senior debentures due 2024 AA- Up to Bt10,000 million senior unsecured debentures due within 2023 AA- Rating Outlook: Stable
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