TU – Moderate growth in the near term

While we like its 2030F strategy, targeting sales and margin improvement in existing operations with a potential M&A, core earnings growth over the next few quarters might be less exciting based on our conservative view on the rise in transformation costs (starting in 3Q24) amid a gradual rise in benefit from the transformation program from 2025 to 2027-28. After the earnings cut, we downgrade our 3-month rating to Neutral from Outperform with a new mid-2025 TP of Bt16 (from Bt18), based on 14x PE (-0.5S.D. over its 10-year PE).

3Q24 net profit was Bt1.4bn, +16% YoY and +15% QoQ, a slight beat on lower one-off expenses of Bt80mn (FX loss and asset impairment). 3Q24 core profit was in line at Bt1.5bn, -2% YoY but +3% QoQ. The YoY slip was due to higher SG&A/sales (partly transformation costs) and higher interest and tax expense that offset better sales, gross margin, and equity income (without Red Lobster).

TU’s new 2024F guidance and 4Q24F view. For 2024F, TU has cut its sales growth target to 3-4% (vs 4-5% earlier), raised target gross margin to 18.5-19.0% (vs 18-18.5% earlier) and lifted SG&A/sales target to 12.5-13% (vs 12-12.5% earlier). In 4Q24F, it expects sales to grow in the ambient unit, with consumption boosted by a return to a normal tuna price and a recent marketing campaign, and the pet care unit. In 4Q24F, gross margin is expected to be healthy, close to its 2024F target, but SG&A expenses will stay high, with transformation costs in 4Q24F close to 3Q24’s Bt234mn.

2030F strategy. TU has introduced its 2030F strategy, focusing on: 1) revitalizing its core business operations – the ambient, chilled, and feed units, 2) emphasizing key growth areas (pet care, frozen, culinary and ingredients), and 3) exploring technology solutions in aquaculture, pet care and alternative protein businesses. Transformation plans. To achieve its 2030F target, TU has kicked off two transformation programs: Project Sonar (transformation of the supply chain and operations) and Project Tailwind (focusing on pet care growth, both commercial and operations). TU targets annualized cost savings from Project Sonar of US$75mn from end-2026 onwards and a boost in annualized operating profit (higher sales and cost savings) from Project Tailwind of US$50mn from end-2027 onwards. Throughout the programs, it estimates transformation costs (additional SG&A expenses) of US$50-60mn: US$13mn in 2H24F, US$20mn in 2025F, US$20mn in 2026F and the rest in 2027F, with annualized capex of Bt4.5-5bn (vs Bt4bn in 2024F). 2030F targets. By 2030F, it targets a rise in sales from US$3.9bn in 2024F to US$7bn (10% CAGR), based on US$6bn organic sales (7% CAGR) and US$1bn inorganic sales via M&As aligned with its 2030F strategy. TU targets a widening in gross margin from 19% in 2024F to 21-23% in 2030F, with EBIT margin rising from 5.6% in 2024F to 8% in 2030F and EBITDA doubling from US$400mn in 2024F to US$700-800mn in 2030F.

Key risks: Inflationary pressure and THB appreciation. Key ESG risks are GHG emission, waste & water management (E), customer welfare, product quality management, health & safety policies (S).