2Q23 core profit was Bt1.3bn, -29% YoY but +58% QoQ, a slight beat on gross margin and SG&A/sales. Based on YTD operations, Red Lobster is less worrying but the slow return of sales volume and continued high tuna costs in the seafood unit remains of concern, in our view. 3Q23F core profit is expected to fall YoY as the weak seafood unit will outstrip the better Red Lobster but rise slightly QoQ on seasonality. Maintain NEUTRAL with an end-2023 TP of Bt15 based on 16x core PE.
2Q23 net profit of Bt1bn, -37% YoY but flat QoQ, 9% above our estimates and consensus, from better-than-expected gross margin and SG&A/sales. Excluding Bt246mn FX loss, 2Q23 core profit was Bt1.3bn, -29% YoY as lower seafood sales and gross margin outpaced better equity income from Red Lobster but +58% QoQ from seasonality. Its 1H23 DPS is Bt0.3 (XD on Aug 21).
2Q23 highlights. Sales fell 13% YoY, hit by a drop in sales volume (-14% YoY) in all main units, led by pet care (-38% YoY), followed by frozen seafood (-10% YoY), and ambient seafood (-12% YoY), as inventory destocking and slow new orders in response to high tuna prices, lower freight revenue and the downsizing of the frozen business in the US overwhelmed the small rise in product prices. Gross margin fell to 16.9% (-50bps YoY) on lower sales volume, a less favorable product mix in pet care and value-added units and higher tuna raw material costs for ambient and pet care units. Gross margin fell in all main units; the exception was frozen seafood, where raw material prices, specifically for shrimp, were lower and on portfolio rationalization. Red Lobster contributed recurring equity income (excluding lease expenses) of -Bt94mn (vs -Bt281mn in 2Q22 and +Bt121mn in 1Q23), up YoY on higher menu prices, lower prices for shrimp, crab and lobster, and lower labor costs from its turnaround strategy, but down QoQ on seasonality.
New 2023 guidance. Seafood unit: TU cut its 2023 sales target to a 5-6% contraction (vs +3-4% earlier) off a 5-6% cut in ITC sales, a 3-4% cut on downsizing US frozen sales and a 2% cut in revenue from lower freight rate and a change in its FX assumption to Bt34/US$ from Bt35/US$. It expects 3Q23 sales to fall at a slower pace YoY than in 1H23, with a slight rise in 4Q23 sales YoY. TU cut its 2023 gross margin target to 16.5-17.5% (vs 17.5-18% earlier), keeping SG&A/sales at 11-12%, with 2H23 gross margin wider HoH (but still down YoY): 1) it expects tuna raw material prices to come down to US$1,700/ton in late 2023 (vs US$1,960/ton, +18% YoY but-2% QoQ, in 3Q23TD) after the end of the FAD ban in Sep-Oct; 2) its profit protection measures such as downsizing the low-margin US frozen business, workforce optimization and raising operational efficiency in factories, and controlling expenses from new employees, travel and marketing. Red Lobster: With 1H23 contribution improving to Bt27mn, Red Lobster’s 2023 recurring equity income target is raised to -Bt500mn (vs -Bt600mn earlier). This implies better 2H23 contribution YoY but weaker HoH on seasonality. As Red Lobster achieved its EBITDA commitment to lenders in 1H23, its US$65mn debt guarantee should be lifted by Sep. TU is keeping Red Lobster’s 2023F dividend income target from preferred share units at zero (flat YoY, calculated from PV of fair value of its preferred shares), factoring in the higher interest rate in the US.
Key risks: inflationary pressure, higher interest rate, and THB appreciation.
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