Equity Analysis /

Thai Union Group PCL: Improved 2H22 core earnings as cost inflation eases

  • Three extra items anticipated in 2Q22

  • Comfort zone of raw tuna price in 3Q22 despite its slight increase

  • Insights into 2Q22—core profit to drop YoY but be flattish QoQ

Bualuang Securities
4 July 2022

Despite lowered expectations for 2Q22 earnings, its 2H22 core earnings will improve strongly HoH and YoY thanks to the easing cost inflation including for raw materials, packaging and freight in 2H22. Our TRADING BUY stands, led by the anticipated 2H22 improved earnings, the listing of I-Tail (ITC) in 4Q22 and the cheap valuation—2022 PER of 11x against its long-term mean of 13.7x.

Three extra items anticipated in 2Q22

The firm will book three extra accounting adjustment items in 2Q22—1) Bt318m in loss from fair value adjustment of Red Lobster (RL)’s preferred shares caused by a jump in the US interest rate; 2) Bt80m in RL’s tax credit related to the above loss and 3) Bt300m in expenses of the factory closure in Germany. For the fair value loss of RL’s preferred shares, the present value of future interest income on preferred shares (which TU normally receives from RL of Bt300-320m/quarter) is estimated to be equal to zero at YE22 (against zero at YE21), based on the new discount rate (pegged on the recent spike of US interest rate). As there will be no interest income from RL’s preferred shares to be booked in 2022, we then expect TU to reverse the Bt318m interest income from RL previously booked in 1Q22, leading to the negative Bt318m interest income from RL in 2Q22 and its zero amount in both 3Q22 and 4Q22. However, if the US interest rate reverses to a rising trend in the future, its interest income from RL is likely to be above zero.