Broker buys TU, raises target to 20 baht after releasing losses in 'Red Lobster'

He told reporters that it is the case Tai Union Group Public Company Limited or Tu Red Lobster has announced the divestment of Red Lobster and will record a one-time non-cash impairment of 18,500 million baht in the fourth quarter of 2023. Three securities firms released their analysis today (January 17, 2024), each with a view. Long-term positivity for TU Group, along with a set of recommendations to “buy” TU shares and increase the share price target to a maximum of 20 baht.

By analysis Bualuang Securities General Co., Ltd Since TU announced that there will be a one-time non-cash impairment charge in the Q4 2023 financial statement from its investment in Red Lobster (RL), this factor is expected to help ease market concerns. They see a 10% upside from their 2024 earnings estimates from no more RL losses and see TU's divestment of RL as a positive for the company. Including long-term stock prices although there will be negative short-term effects. As a result, net losses will be reported in the financial statements for the fourth quarter of 2023 and 2023. Management announced that the company will stop recording RL-related losses from the first quarter of 2024 onwards.

Therefore, we still recommend a “buy” on TU shares with estimated earnings in 2024, expected to have an upside of approximately 10% (prior to TU’s announcement, it was expected to see a share of losses in 2024 amounting to 537 million baht of shares held (in RL) because the profit estimate is expected to rise by 10%, and the 2024 price target is based on the discounted cash flow method. Therefore, it is likely to rise to 19 baht per share from the original 17.80 baht per share.

At the same time, it is believed that it makes sense for TU to write off its investment losses over the past seven years. TU acquired a 49% stake in RL, the world's largest seafood restaurant operator, from Golden Gate Capital last month. October 2016, TU paid $575 million, divided into $230 million for a 25% stake in RL and $345 million. “The preferred shares are equivalent to another 24% interest, making TU the largest shareholder in RL. Later in August 2020, Golden Gate Capital sold its remaining shares in RL to the strategic partners of the executives of TU and RL. Since the acquisition, TU has realized and reported a share of losses 3.800 million baht.

As for the impact of the TU announcement on the financial statements, the net loss in 2023 is initially expected to reach 14,300 million baht (previously the profit was expected to be 4,200 million baht). In addition, the net debt-to-equity ratio is currently found to be 14,300 million baht. The previous year 0.88. Although the specified net debt-to-equity ratio is less than the TU requirement of 2 times, there are other ratios that need to be approved by bondholders. To exclude this non-cash item from the ratio calculation. This will allow it to pay dividends in the second half of 2023, although it will report a net loss in 2023.

side PIE SECURITIES PUBLIC LIMITED It is estimated that TU announced the divestment in RL after investing since 2016, with the total investment currently standing at approximately US$530 million. Or the value is approximately 18,500 million baht, the reason for divestment is that TU has a growth plan until 2030 because it will shift to focus more on its core business such as seafood and pet food groups, and RL also has a need for investment that is constantly increasing but due to its inability to Making a profit, TU decided to withdraw the said investment.

Keeping in mind that it hurts but it's over. This outcome is seen as a negative factor in the short term. But in the long term, there is no need to recognize losses from RL which over the past three years have averaged more than 3,600 million baht per year (including accounting losses), although this will lead to increased tax payments. No interest has been received (averaging 1,000 million baht per year but has stopped accumulating since Q2 2021), but overall it is expected to be more positive.

However, the 2024 forecast may be revised again after the earnings announcement. Obviously, doing so will be beneficial in the long run. Therefore, we maintain our buy recommendation as before with a target price of 19.70 baht per share.

At the same time, the effect is that TU will record a decline in the value of this investment in the period 4/2023 (the actual value will depend on the loss of RL in Q4 2023 and the currency back), resulting in the business in this period likely to decline. Big losses. The original expectation is that there will be a profit of approximately 1,500 million baht.

But the loss was due to a breach of some terms with the creditors. This may affect the dividend payment. However, since it is a non-cash clause, TU will negotiate with creditors to relax the terms. To be able to pay dividends (paid from operating results excluding impairment items)

Moreover Krungsri Securities Public Company Limited It was reported that TU announced plans to dispose of its 49% stake in RL, a company specializing in seafood restaurants. While the company searches for a buyer, it will reduce its total Thai riyal investment by 18.5 billion baht and record a one-time non-cash loss in 4Q23.

Although the loss has been achieved, management expects dividends to continue as usual. (Wait for approval of the waiver of conditions from the bank and bondholders first), which is expected to reach 0.57 baht per share for 2023, and is willing to look favorably on this process. Because accounting improvements that recognize depreciation of depreciated assets (write-offs) will prevent TU from having to record losses from RL, which are expected to reach 1,200 million baht, again from 2024 onwards, which will result in an increase in profits from the core business by 22.5 % in 2024 and 18.2% in 2025. We therefore recommend “buy” and increase the target price to 20 baht per share.

While announcing the share buyback project, use a budget of no more than 3,600 million baht to purchase no more than 200 million shares from February 20, 2024 to June 30, 2024 (equivalent to 18 baht per share) to support the share price. Because executives believe that the current stock price is undervalued. I believe this issue will help support the stock price. In the event of a short-term stock price correction, the target price depends on the ratio of stock price to net earnings (P/E), and the main risk lies in the volatility of raw material prices. The price target is based on a 2024 P/E of 12.3x, which is slightly above the long-term average of 12.8x due to accelerating earnings. The main risk lies in the volatility of raw material prices.