TRIS Rating affirms the company rating on Thai Union Group PLC (TU) and the ratings on its outstanding senior unsecured debentures at ?A+?, and subordinated capital debentures (hybrid debentures) at ?A-? and revises the rating outlook to ?positive? from ?stable?.
The ratings continue to reflect TU?s strong market position as one of the world?s leading seafood processors, the diversity of its products and markets, the well-known brands of its supplies in Europe and the United States (US), and barriers to market entry including fishing quotas, and high capital investment. The ratings also take into consideration concerns over the impacts of container shortages and the uncertainty surrounding the development of the Coronavirus Disease 2019 (COVID-19) pandemic.
The outlook revision reflects TU?s strengthening financial profile supported by the improvement in the leverage ratio and profit margin, following the company?s strategy to focus on innovative and value-added products, efficiency improvement and cost rationalization.
KEY RATING CONSIDERATIONS
Solid operating results
TU?s operating performance improved in the first half of 2021, driven by the recovery of its frozen and chilled seafood business, combined with strong operating results from the PetCare and value-added product segments.
Thanks to the vaccination progress and opening of economies, particularly in the US and European markets, TU?s frozen and chilled seafood business recovered strongly after bottoming out in 2020. The PetCare and value-added product categories continue to post strong growth in revenue and margins, resulting from the growth trends for PetCare products, as well as new product offerings.
During the first half of 2021, TU?s operating revenue improved by 4.6% year-on-year (y-o-y) to THB67.4 billion, while earnings before interest, taxes, depreciation, and amortization (EBITDA) surged by 16.1% y-o-y to THB7.8 billion. The EBITDA margin stood at 11.5% in the first half of 2021, up from 7%-10% during the past few years.
TRIS Rating expects TU to continue delivering good operating results, despite the prospects of several challenges in the coming years. With its strategy to focus on high-margin, value-added, and innovative products, TU has several new products launches in the pipeline. We expect the rising revenue contribution from innovative products, as well as TU?s strategy to focus on efficiency improvements and cost reductions combined with the prospect of a post-COVID economic recovery, should help the company achieve satisfactory operating performance over the next few years.
Signs of improvement from Red Lobster
Red Lobster (RL), a US restaurant chain in which TU holds a 49% shareholding on a fully diluted basis, comprised of 25% equity stake and 24% in preferred shares at USD345 million, was materially affected by the pandemic and lockdown measures in 2020.
During the first half of 2021, RL?s operating performance improved to some extent, driven by a recovery in the US economy as well as the company? s product strategies and cost optimization. Presently, all RL?s restaurants have resumed dine-in services, while off-premises revenue has more than doubled from the pre-COVID level. As a result, TU posted a loss of THB105 million from its investment in associated companies during the first half of 2021, improving from a THB597 million loss during the same period of 2020. TRIS Rating expects RL?s operation to improve gradually but more time could be needed to draw traffic and improve operating margins to reach breakeven levels.
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Improved capital structure
TU?s capital structure and financial leverage improved materially following solid operating results from its core business, combined with the company?s strategy to scale down capital spending during the pandemic. TU?s total debt to capitalization ratio was 52.3% in 2020 and 53.1% at the end of June 2021, down from 55%-60% in 2017-2019. The ratio of net debt to EBITDA improved to 4.2 times in 2020 through the first half of 2021, from 6-7 times at year-end 2017-2019.
Going forward, we expect TU?s leverage to improve further as the company has no sizable acquisitions planned for the next few years. The company?s operations should improve on the back of escalating contributions from high-margin innovative products and performance enhancement programs. TU also expects to improve its balance sheet from the spin-off of two subsidiaries, an aqua feed company and a pet food company, to list on the Stock Exchange of Thailand (SET).
In our base-case scenario, TU?s capital expenditure is projected to be THB5.0-THB5.5 billion per annum during 2021-2023. We project its debt to EBITDA ratio to hover around 3.8-4.2 times during 2021-2023. The debt to capitalization ratio is projected to stay below 50%.
Product diversification
As the world?s largest tuna canner, the company processes about 570,000 tons of tuna per annum, approximately one-fifth of the canned tuna produced worldwide. TU is also one of the world?s leading seafood companies. Apart from tuna, TU?s largest revenue contributor (36% of total sales in 2020), the company?s product portfolio comprises shrimp and shrimp-related products (26%), PetCare (9%), sardines and mackerel (8%), salmon (7%), and value-added and other products (13%).
The large scale of TU?s operation allows it to achieve cost competitiveness and greater negotiating power with raw material suppliers. TU also utilizes by-products to enhance its competitive position. For example, fish bones, skin, and fish head, are processed into value-added products such as crude and refined tuna oil, and its patented, new product development - tuna bone calcium.
Geographic diversification
TU?s business risk is partly mitigated through the geographic diversity of its operations and markets. Production facilities are spread across 14 countries on four continents. TU has geographically diversified sources of revenue. Sales in the North America, its major market, represented 43% of total revenue in 2020. Customers in Europe accounted for 29%, followed by Thailand (10%), and Japan (5%). TU?s ongoing efforts to broaden its geographic coverage aim to alleviate potential impacts of disease outbreaks, trade barriers, and regulations governing the fishing industry.
Adequate liquidity
We assess TU?s liquidity to be adequate. Over the next 12 months, the company will have debt repayments of THB20.6 billion. The primary source of repayment shall be from funds from operations (FFO) of THB11 billion per annum. The liquidity buffer is supported by cash reserves, amounting to THB6.5 billion at the end of June 2021, as well as undrawn credit facilities of about THB5 billion from several financial institutions.
BASE CASE ASSUMPTIONS
? Operating revenue to increase by 2%- 4% during 2021-2023.
? Gross profit margin to be 17%-18%; EBITDA margin to remain in the 9%-10% range.
? Total capital spending to be THB5.0-THB5.5 billion per annum during 2021-2023.
RATING OUTLOOK
The ?positive? outlook reflects an improvement of TU?s financial profile, supported by the company?s strategy to focus on innovative products, as well as the efficiency improvement.
RATING SENSITIVITIES
TU?s ratings could be revised upward if TU?s capital structure and cash flow protection continue to improve, such that the ratio of adjusted debt to EBITDA fall below 4 times for a sustained period. On the contrary, a downgrade could occur if the operating performance is materially weaker than expected or if TU makes any sizable debt-funded investment that materially weakens its balance sheet and cash flow protection.
COMPANY OVERVIEW
TU was established in 1977 by the Chansiri family. TU is one of the world's leading seafood processors and the largest producer of shelf-stable tuna products. The company?s product lines cover Tuna, Shrimp, Lobster, Sardines, Salmon, PetCare, and more. TU?s major tuna production facilities are located in Thailand, the US, Ghana, and the Seychelles Islands. TU also has production facilities in Vietnam, France, Germany, Norway, Poland, Portugal, and Lithuania. The company?s worldwide annual sales exceed THB132.4 billion (USD4.2 billion) with a global workforce of about 44,800 people.
TU has strong market presences with well-known branded products in the US and the European Union (EU). Thai Union Europe (TUE), formerly MW Brands SAS, has several market-leading brands in Europe, such as ?John West?, ?Petit Navire?, ?Mareblu?, and ?Parmentier?. The John West brand is ranked first in the United Kingdom (UK) (34% market share), Ireland (49%), and the Netherlands (33%), according to data from AC Nielsen and an IRI Report provided by TU?s management. Petit Navire, another well-recognized with number 1 ranking brand, has a 39% market share in France. In the US, TU?s ?Chicken of the Sea? brand was ranked third in the canned tuna market with a 10% market share in terms of sales value in 2020. Starkist is the largest canned tuna processor (46%), followed by Bumble Bee (24%). While, Thai brands include ?SEALECT?, ?Fisho?, ?Qfresh?, ?Monori?, ?Bellotta?, and ?Marvo?. ??
RELATED CRITERIA
- Issue Rating Criteria, 15 June 2021
- Rating Methodology ? Corporate, 26 July 2019
- Hybrid Securities Rating Criteria, 12 September 2018
- Key Financial Ratios and Adjustments, 5 September 2018
Thai Union Group PLC (TU)
Company Rating: A+
Issue Ratings:
TU221A: THB2,000 million senior unsecured debentures due 2022 A+
TU237A: THB2,000 million senior unsecured debentures due 2023 A+
TU241A: THB2,500 million senior unsecured debentures due 2024 A+
TU242A: THB1,050 million senior unsecured debentures due 2024 A+
TU26NA: THB2,000 million senior unsecured debentures due 2026 A+
TU271A: THB4,000 million senior unsecured debentures due 2027 A+
TU287A: THB5,000 million senior unsecured debentures due 2028 A+
TU29NA: THB4,000 million senior unsecured debentures due 2029 A+
TU19PA: THB6,000 million subordinated capital debentures A-
Rating Outlook: Positive