Thai Union Group Underperform (17E TP Bt22.20)
Thai Union Group Underperform (17E TP Bt22.20)
Company Update
Close Bt20.70 Food & Beverage
Earning upgrade/Earnings downgrade/Overview unchanged
12 October 2016
Making a US$575mn investment in Red Lobster Price Performance (%)
Source: SET Smart
FY16
FY17
Consensus EPS (Bt)
1.266
1.441
KT ZMICO vs. consensus Share data
‐11.5%
‐3.5%
Reuters / Bloomberg
TUF.BK/TUF TB
Paid‐up Shares (m)
4,771.82
Par (Bt)
0.25
Market cap (Bt bn / US$ m)
99.00/2,793.00
Foreign limit / actual (%)
45.00/38.11
52 week High / Low (Bt)
23.00/15.80
Avg. daily T/O (shares 000)
10,763.00
NVDR (%)
13.86
Estimated free float (%)
64.79
Beta
0.54
URL
www.thaiuniongroup.com
CGR
Anti‐corruption
Level 2 (Declared)
Phornsri Laysanitsaerekul Analyst , no 17621 [email protected] 66 (0) 2624‐6258
High investment cost in new business (Red Lobster) The recent investment in Red Lobster prompted us to revise up our 2017E core profit forecast by 4.2% as well as raise our target price to Bt22.20/share (from Bt21.30/share previously), based on 16x PER. However, this transaction worth about Bt20bn is sizable and looks unattractive compared to the expected short‐term gain despite some synergy benefits in the long term. Hence, we maintain our “Underperform” rating. To acquire Red Lobster with borrowing of US$575mn TU signed a contract to make an investment of US$575mn to acquire Red Lobster (RL) from Golden Gate Private Equity, Inc. Following the transaction, TU will have ownership of 25% of the outstanding units in RL (US$230mn) and 24% of convertible preferred units (US$345mn with a tenor of ten years from the date of completion and a return of 8% p.a.). The transaction was expected to be completed by 11 Oct 16 and it is expected to be funded entirely by short‐term borrowing. Within six months, the firm will issue bonds in baht terms and long‐term borrowing with an interest rate of below 4% to repay the short‐term borrowing. Expanding to new business to reach more consumers With this deal, TU is expanding to a new business, i.e., a seafood restaurant chain with strong branding and the biggest chain size in the world consisting of 754 outlets. With RL holding a market share of over 50% in North America, TU should be able to reach consumers directly and benefit from the dining‐out habits of consumers in the US. We expect to see synergy benefits with RL in the medium to long term and this deal should generate good returns to TU’s shareholders. 2016E core profit forecast cut by 1.3% but 2017E earnings raised by 4.2% Assuming that the firm realizes the results of this transaction from Oct‐ 16 onwards, we have to fine‐tune our 2016E core profit estimate down by 1.3% to Bt5.3bn and raise the 2017E projection by 4.2% to Bt6.6bn to reflect the expected benefits that TU will gain from the deal and the estimated business synergies with RL. Financials and Valuation FY Ended 31 Dec 2013 Revenues (Btmn) 112,813 Net profit (Btmn) 2,270 EPS (Bt) 0.62 Norm. EPS (Bt) 0.48 Norm. EPS growth (%) ‐48% Dividend (Bt) 0.37 BV (Bt) 8.61 FY Ended 31 Dec 2013 PER (x) 33.25 EV/EBITDA (x) 19.52 PBV (x) 2.40 Dividend yield (%) 1.80% ROE (%) 5.9% Net gearing (%) 106.6
2014 121,402 5,092 1.08 1.01 111% 0.55 9.15 2014 19.10 13.56 2.26 2.66% 12.2% 101.5
2015 125,183 5,302 1.11 1.08 7% 0.63 9.49 2015 18.63 12.53 2.18 3.04% 11.9% 83.5
REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 1 of 6
2016E 134,018 5,349 1.12 1.12 4% 0.56 9.98 2016E 18.47 15.00 2.07 2.71% 11.5% 113.0
2017E 152,482 6,622 1.39 1.39 24% 0.69 10.80 2017E 14.92 12.54 1.92 3.35% 13.4% 100.4
TU acquires 25% of common units and 24% of convertible preferred units in Red Lobster TU signed a contract to make an investment of US$575mn to acquire Red Lobster (RL) from Golden Gate Private Equity, Inc. Following the transaction, TU will have ownership of 25% of the common units in RL (US$230mn) and 24% of convertible preferred units (US$345mn with a tenor of ten years from the date of completion and a return of 8% p.a.). The transaction was expected to be completed by 11 Oct 16. 100% funding from bridge loans (six months) from BAY, BBL and SCB TU will use bridge loans to fund the transaction in the total amount of US$575mn, which will be taken out from three domestic commercial banks (BAY, BBL and SCB) with an interest rate of LIBOR+1% within six months from now. After that, TU will issue bonds in baht terms and take out long‐term loans with funding cost of below 4% to repay the bridge loans. Undemanding in terms of EV/EBITDA in the long term but demanding in the short term The acquisition value of US$575mn implies EV/EBITDA of the past 12 months before Aug‐16 at 7.4x. This seems inexpensive when compared to the EV/EBITDA of 9‐11x for the dining restaurant chain business, but PER cannot be assessed as the net loss will remain (i.e., from a one‐time expense from the change of RL’s business ownership to Golden Gate Private Equity, Inc. in 2015). Note that the 2017E EV/EBITDA and PER of TU are 12x and 16x, respectively. While this deal looks undemanding in terms of EV/EBITDA, it is rather demanding in terms of PER when compared with the PER of TU. Hence, considering PER, we think this deal looks rather expensive in the short term. Nonetheless, if we consider EV/EBITDA in the long term, the deal seems inexpensive because it should create clear business synergies within the next few years. TU expects RL’s earnings to rebound to profit by 2017E. In the short term, TU will receive a dividend yield of 8% p.a. from the rights ownership of the convertible preferred units (net US$22mn after tax), which is higher than the additional funding cost (US$18‐20mn p.a.). Expanding to new business to reach more consumers for better outlook in medium to long term This transaction enables TU to expand to the restaurant chain business, which is a new market for the firm. Note that RL has been TU’s client for over 20 years, with sales value of over US$50mn p.a. (i.e., TU supplies 30‐35% of RL’s total shrimp consumption while other seafood supplies from TU include lobster, salmon, etc., accounting for 15% of RL’s total demand; there is a growing opportunity for more orders of lobster and salmon from RL considering its massive customers of around 110mn customers p.a.). TU’s management views that this deal is good for the firm as it will enable it to expand to a new food business segment, i.e., a restaurant‐chain business with strong branding in the early stage of a business turnaround. RL’s business should support TU’s core business pretty well as RL is the world’s biggest operator of seafood restaurants, with a network of 754 outlets (677 outlets in the US, 27 outlets in Canada and 50 outlets in other countries, e.g., Japan. Malaysia, Mexico, etc.) With its market share of more than 50%, the firm is able to reach its customers directly and benefits from the dining‐out habits of US consumers. We expect TU to see a greater business relationship with RL, i.e., from sales value of US$50mn currently to US$150mn in the medium term (i.e., 1.5‐3 years). Note that this investment isn’t part of TU’s attempt to achieve its sales growth target of US$8bn by 2020 but it should also yield good returns for TU’s shareholders. 2016E core profit forecast cut by 1.3% but 2017E earnings raised by 4.2% TU expects RL’s earnings to rebound to profit in 2017E. Our preliminary estimate based on the latest 12 months of TU’s operation suggests that it may realize a profit contribution from RL as well as other income in the amount of around US$7‐8mn p.a., dividends from the convertible preferred units of US$22mn (net after tax) and additional interest expenses of around US$18‐20mn. Therefore, TU should see additional gains of US$9‐12mn p.a. (equivalent to Bt0.07‐0.09/TU share) from this acquisition. As this deal was completed on 11 Oct‐16, we had to revise down our 2016E earnings projection by 1.3% and raise the 2017E earnings estimate by 4.2%, with the result of the RL transaction being realized from 11 Oct‐16 onwards. Our newly adjusted projections assume the following: REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 2 of 6
1. 2. 3. 4.
5.
With a closer relationship with RL, TU should gain higher sales from RL, up from US$50mn currently to US$150mn in the medium‐long term. TU is expected to gain profit contributions from RL at around US$4mn p.a., based on TU’s preliminary estimate that RL’s earnings will rebound to the black from 2017E onwards. TU will gain a dividend yield of 8% p.a. from the ownership of convertible preferred units valued at US$345mn and a management fee of around US$2mn p.a. TU will book acquisition expenses from this transaction (assumed at 0.7% of investment value) in 4Q16, with financial costs linked to the acquisition (assumed at 0.8% of the total investment value) to be booked gradually during 4Q16 – 1Q17. TU will bear additional long‐term liabilities of Bt20.1bn (US$575mn), based on the assumed interest rate of 3.5% (
Company Update
Close Bt20.70 Food & Beverage
Earning upgrade/Earnings downgrade/Overview unchanged
12 October 2016
Making a US$575mn investment in Red Lobster Price Performance (%)
Source: SET Smart
FY16
FY17
Consensus EPS (Bt)
1.266
1.441
KT ZMICO vs. consensus Share data
‐11.5%
‐3.5%
Reuters / Bloomberg
TUF.BK/TUF TB
Paid‐up Shares (m)
4,771.82
Par (Bt)
0.25
Market cap (Bt bn / US$ m)
99.00/2,793.00
Foreign limit / actual (%)
45.00/38.11
52 week High / Low (Bt)
23.00/15.80
Avg. daily T/O (shares 000)
10,763.00
NVDR (%)
13.86
Estimated free float (%)
64.79
Beta
0.54
URL
www.thaiuniongroup.com
CGR
Anti‐corruption
Level 2 (Declared)
Phornsri Laysanitsaerekul Analyst , no 17621 [email protected] 66 (0) 2624‐6258
High investment cost in new business (Red Lobster) The recent investment in Red Lobster prompted us to revise up our 2017E core profit forecast by 4.2% as well as raise our target price to Bt22.20/share (from Bt21.30/share previously), based on 16x PER. However, this transaction worth about Bt20bn is sizable and looks unattractive compared to the expected short‐term gain despite some synergy benefits in the long term. Hence, we maintain our “Underperform” rating. To acquire Red Lobster with borrowing of US$575mn TU signed a contract to make an investment of US$575mn to acquire Red Lobster (RL) from Golden Gate Private Equity, Inc. Following the transaction, TU will have ownership of 25% of the outstanding units in RL (US$230mn) and 24% of convertible preferred units (US$345mn with a tenor of ten years from the date of completion and a return of 8% p.a.). The transaction was expected to be completed by 11 Oct 16 and it is expected to be funded entirely by short‐term borrowing. Within six months, the firm will issue bonds in baht terms and long‐term borrowing with an interest rate of below 4% to repay the short‐term borrowing. Expanding to new business to reach more consumers With this deal, TU is expanding to a new business, i.e., a seafood restaurant chain with strong branding and the biggest chain size in the world consisting of 754 outlets. With RL holding a market share of over 50% in North America, TU should be able to reach consumers directly and benefit from the dining‐out habits of consumers in the US. We expect to see synergy benefits with RL in the medium to long term and this deal should generate good returns to TU’s shareholders. 2016E core profit forecast cut by 1.3% but 2017E earnings raised by 4.2% Assuming that the firm realizes the results of this transaction from Oct‐ 16 onwards, we have to fine‐tune our 2016E core profit estimate down by 1.3% to Bt5.3bn and raise the 2017E projection by 4.2% to Bt6.6bn to reflect the expected benefits that TU will gain from the deal and the estimated business synergies with RL. Financials and Valuation FY Ended 31 Dec 2013 Revenues (Btmn) 112,813 Net profit (Btmn) 2,270 EPS (Bt) 0.62 Norm. EPS (Bt) 0.48 Norm. EPS growth (%) ‐48% Dividend (Bt) 0.37 BV (Bt) 8.61 FY Ended 31 Dec 2013 PER (x) 33.25 EV/EBITDA (x) 19.52 PBV (x) 2.40 Dividend yield (%) 1.80% ROE (%) 5.9% Net gearing (%) 106.6
2014 121,402 5,092 1.08 1.01 111% 0.55 9.15 2014 19.10 13.56 2.26 2.66% 12.2% 101.5
2015 125,183 5,302 1.11 1.08 7% 0.63 9.49 2015 18.63 12.53 2.18 3.04% 11.9% 83.5
REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 1 of 6
2016E 134,018 5,349 1.12 1.12 4% 0.56 9.98 2016E 18.47 15.00 2.07 2.71% 11.5% 113.0
2017E 152,482 6,622 1.39 1.39 24% 0.69 10.80 2017E 14.92 12.54 1.92 3.35% 13.4% 100.4
TU acquires 25% of common units and 24% of convertible preferred units in Red Lobster TU signed a contract to make an investment of US$575mn to acquire Red Lobster (RL) from Golden Gate Private Equity, Inc. Following the transaction, TU will have ownership of 25% of the common units in RL (US$230mn) and 24% of convertible preferred units (US$345mn with a tenor of ten years from the date of completion and a return of 8% p.a.). The transaction was expected to be completed by 11 Oct 16. 100% funding from bridge loans (six months) from BAY, BBL and SCB TU will use bridge loans to fund the transaction in the total amount of US$575mn, which will be taken out from three domestic commercial banks (BAY, BBL and SCB) with an interest rate of LIBOR+1% within six months from now. After that, TU will issue bonds in baht terms and take out long‐term loans with funding cost of below 4% to repay the bridge loans. Undemanding in terms of EV/EBITDA in the long term but demanding in the short term The acquisition value of US$575mn implies EV/EBITDA of the past 12 months before Aug‐16 at 7.4x. This seems inexpensive when compared to the EV/EBITDA of 9‐11x for the dining restaurant chain business, but PER cannot be assessed as the net loss will remain (i.e., from a one‐time expense from the change of RL’s business ownership to Golden Gate Private Equity, Inc. in 2015). Note that the 2017E EV/EBITDA and PER of TU are 12x and 16x, respectively. While this deal looks undemanding in terms of EV/EBITDA, it is rather demanding in terms of PER when compared with the PER of TU. Hence, considering PER, we think this deal looks rather expensive in the short term. Nonetheless, if we consider EV/EBITDA in the long term, the deal seems inexpensive because it should create clear business synergies within the next few years. TU expects RL’s earnings to rebound to profit by 2017E. In the short term, TU will receive a dividend yield of 8% p.a. from the rights ownership of the convertible preferred units (net US$22mn after tax), which is higher than the additional funding cost (US$18‐20mn p.a.). Expanding to new business to reach more consumers for better outlook in medium to long term This transaction enables TU to expand to the restaurant chain business, which is a new market for the firm. Note that RL has been TU’s client for over 20 years, with sales value of over US$50mn p.a. (i.e., TU supplies 30‐35% of RL’s total shrimp consumption while other seafood supplies from TU include lobster, salmon, etc., accounting for 15% of RL’s total demand; there is a growing opportunity for more orders of lobster and salmon from RL considering its massive customers of around 110mn customers p.a.). TU’s management views that this deal is good for the firm as it will enable it to expand to a new food business segment, i.e., a restaurant‐chain business with strong branding in the early stage of a business turnaround. RL’s business should support TU’s core business pretty well as RL is the world’s biggest operator of seafood restaurants, with a network of 754 outlets (677 outlets in the US, 27 outlets in Canada and 50 outlets in other countries, e.g., Japan. Malaysia, Mexico, etc.) With its market share of more than 50%, the firm is able to reach its customers directly and benefits from the dining‐out habits of US consumers. We expect TU to see a greater business relationship with RL, i.e., from sales value of US$50mn currently to US$150mn in the medium term (i.e., 1.5‐3 years). Note that this investment isn’t part of TU’s attempt to achieve its sales growth target of US$8bn by 2020 but it should also yield good returns for TU’s shareholders. 2016E core profit forecast cut by 1.3% but 2017E earnings raised by 4.2% TU expects RL’s earnings to rebound to profit in 2017E. Our preliminary estimate based on the latest 12 months of TU’s operation suggests that it may realize a profit contribution from RL as well as other income in the amount of around US$7‐8mn p.a., dividends from the convertible preferred units of US$22mn (net after tax) and additional interest expenses of around US$18‐20mn. Therefore, TU should see additional gains of US$9‐12mn p.a. (equivalent to Bt0.07‐0.09/TU share) from this acquisition. As this deal was completed on 11 Oct‐16, we had to revise down our 2016E earnings projection by 1.3% and raise the 2017E earnings estimate by 4.2%, with the result of the RL transaction being realized from 11 Oct‐16 onwards. Our newly adjusted projections assume the following: REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 2 of 6
1. 2. 3. 4.
5.
With a closer relationship with RL, TU should gain higher sales from RL, up from US$50mn currently to US$150mn in the medium‐long term. TU is expected to gain profit contributions from RL at around US$4mn p.a., based on TU’s preliminary estimate that RL’s earnings will rebound to the black from 2017E onwards. TU will gain a dividend yield of 8% p.a. from the ownership of convertible preferred units valued at US$345mn and a management fee of around US$2mn p.a. TU will book acquisition expenses from this transaction (assumed at 0.7% of investment value) in 4Q16, with financial costs linked to the acquisition (assumed at 0.8% of the total investment value) to be booked gradually during 4Q16 – 1Q17. TU will bear additional long‐term liabilities of Bt20.1bn (US$575mn), based on the assumed interest rate of 3.5% (
