https://www.undercurrentnews.com/2020/02/27/analyst-sees-tuna-price-volatility-baht-exchange-swinging-in-thai-unions-favor/
Tuna price volatility and Thai baht strength have been headwinds for Thai Union Group in 2019, but there are expectations of a sharp turnaround in earnings for 2020, according to market analyst "the Value Pendulum".
Market consensus expects Thai Union's normalized earnings to grow by 41% year-on-year in the 2020 financial year, off a low base in FY2019.
Volatility in tuna price has had a mixed impact on Thai Union in past quarters. A -16.3% quarter-on-quarter drop in tuna price in Q2 2019 was positive for the firm, as the company's branded tuna business benefited from lower raw material costs.
However, with tuna price remaining at a historic low, with flattish q-o-q growth in Q3 2019, Thai Union's private-label business suffered as clients held back on new orders in anticipation of a further decline in tuna price, and selling prices for private-label tuna products were lowered, they noted.
"The key difference between Thai Union's private label business and its branded tuna business is that the former has a relatively shorter inventory cycle of one to two months, compared with approximately half a year for the latter."
Tuna prices fell -21.9% q-o-q and -32.5% year-on-year to $950 per metric ton in Q4 2019, which represented a new historic low. Thai Union's revenue and gross profit declined -8.8% and -1.3% y-o-y, partly due to low tuna prices, and partly due to the strengthening of the Thai baht. "If tuna price remains persistently low in 2020, Thai Union's private-label tuna business could continue to be negatively impacted, while its branded tuna business is likely to eventually have to lower its selling price in line with the market despite a longer inventory cycle."
However, it seems tuna prices have already hit the bottom in Q4 2019 with signs of normalization at the start of 2020. Tuna price was at $1,350/t in January 2020, representing a +42% increase from Q4. At the company's Q4 2019 earnings call, Thai Union shared a similar view on tuna price, expecting it to "be back to a more normal situation, something around $1,400/t to $1,500/t" for 2020.
"Assuming tuna price continues to remain at the current level in Q1 2020, it will be positive for Thai Union. The company's branded tuna business should see gross margin expansion, as it benefits from the historical low tuna price in H2 2019 due to the segment's longer inventory cycle. Thai Union's private-label tuna business should see a recovery in sales growth, due to its shorter inventory cycle and the return of order flow from clients who adopted a 'wait-and-see' approach earlier."
Thai Union's "disappointing performance" in FY2019 was due to both tuna price volatility and the negative impact of a strong Thai baht, the analyst went on. (It should be noted the firm achieved a record profit in 2019, despite its headwinds).
"As Thai Union generates about half of its revenue from export sales, the strengthening of the Thai baht has hurt the company in 2019."
The Thai baht was the best-performing currency in Asia in 2019, gaining +8.6% against the US dollar. There was a sharp reversal in January 2020, with the Thai baht declining -3.7% against the US dollar. Economists expect the Thai baht to weaken further against the US dollar in 2020.
Thai Union has an optimistic outlook for FY2020; it is guiding for a revenue growth rate of 3-5% (versus a -5.3% decline for FY2019) and a gross margin of 16% (gross margin for FY2019 was 15.9%) this year.