We expect 2Q23F net profit of Bt940mn, -42% YoY and -8% QoQ, with lower seafood sales and margin outpacing better contribution from Red Lobster YoY. We cut our 2023-24F by 15% each year, factoring in weak seafood sales and margin. We expect 3Q23F to fall YoY as the continued weak seafood unit will outstrip the better Red Lobster unit but rise QoQ on seasonality. Maintain NEUTRAL with a new end-2023 TP of Bt15 (from Bt16.5), based on 14x core PE (-0.5 S.D. to 10-year historical core PE).
Expect 2Q23F net profit of Bt940mn, -42% YoY and -8% QoQ. Excluding Bt134mn extra loss (Bt264mn expenses on fair value adjustment for Red Lobster preferred shares outpacing Bt130mn FX gain), 2Q23F core profit will be Bt1.07bn, -40% YoY but flat QoQ. The drop YoY will be on 1) lower sales (-9% YoY) on lower sales volume in all units from the normalized lead time for ocean shipments and high tuna price leading customers to slow new orders, outpacing higher product prices (+7-8% YoY in the ambient unit); 2) narrowing in gross margin to 16% (-140bps YoY) on lower sales volume, lower high-margin sales and higher tuna costs; 3) lower ITC earnings after cutting its stake 78% from 98%. This will outpace better recurring equity income from Red Lobster at -Bt120mn (vs -Bt281mn in 2Q22) on better sales from revived guest counts, lower lobster and crab costs and lower labor costs after adjusting operations. It will release results on Aug 7.
2023 guidance unchanged. Seafood unit: TU still targets 2023 sales growth of 3-4% (vs our 1H23F estimates of -10% YoY) with a gross margin of 17.5-18% (vs our 1H23F estimate of 15.5%). TU expects a slower drop in sales YoY in 3Q23F with a small rise YoY in 4Q23F, with a fall in sales volume slowing YoY amid higher prices. Spot skipjack tuna price rose to US$2,000/ton in 2Q23 (+24% YoY, +10% QoQ) on lower catches in poor weather. TU expects spot skipjack tuna price in Aug-Sep to edge down 5-10% from 2Q23, anticipating better catches from a stronger El Nino. Red Lobster: TU still targets 2023 recurring equity income from Red Lobster at -Bt600mn (from -Bt1.2bn in 2022 and zero in our 1H23F estimates), improved by a more affordable menu, higher menu prices (in Aug 2022) and lower costs for lobster and crab. TU keeps Red Lobster’s 2023F dividend income from preferred share units at zero (vs zero in 2022 and Bt1.2bn in 2021, calculated from PV of fair value of its preferred shares), factoring in the higher interest rate in the US.
Cut earnings. We cut our 2023-24F by 15% each year, factoring in weaker sales and gross margin than anticipated. The slow return in sales volume amid higher tuna raw material costs may continue to pressure sales and margin YoY in the seafood unit in 3Q23. While Red Lobster’s 1H23 operations seem to be tracking its commitment with Red Lobster creditors (EBITDA target at US$60mn in 1H23), we will continue to monitor its 2H23F operations as the US economy slows down. If Red Lobster operations do not meet its commitment with creditors (EBITDA target at US$120mn in 2023), TU may have to book a part of its US$65mn credit guarantee to Red Lobster’s creditors as loans to Red Lobster (with provision expense for doubtful debt, if any, based on its auditor’s recommendation).
Key risks: inflationary pressure, higher interest rate, and THB appreciation.
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