A few years ago, I joined two friends for deep-sea fishing in the Andaman Sea.
After leaving the harbour in the wee hours, we spent the whole day fishing, interrupted only by a break on a remote island where a couple of islanders helped us to barbeque some of our catch.
I loved it. It brought back fond memories of growing up in the northern part of the Bay of Bothnia, Sweden, where family and friends used to stay in island cottages during the summer for fishing and relaxation.
I guess it helps to explain why I took a fancy to a fish-related stock in 2001 while working as an Asia analyst in London.
During that time, I recommended a company with the unassuming name Thai Union Frozen Products PCL (TUF). I noted that, “the stock is on the move, but we think it has much further to go.”
That proved to be an understatement.
Since 2001, TUF is up 20 times. Yes, that’s right, if I had invested $1,000 at that time and reinvested all dividends in shares, it would now be worth nearly $20,000 – equivalent to an annualised return of 24.6%.
Pity I didn’t follow my own advice. This was mainly due to a cumbersome and long-term lock-in period (which for those of you who don’t know is something that a financial company imposes on its staff in order to stop them using analyst data to buy shares before clients had been given the information. The exact period varies, but in this case, it was many months as my employer wanted to ensure that the company wasn’t accused of unethical practices).
Nevertheless, I think this stock is a great example of the staggering potential that emerging market stocks can have.
Let’s take a look at why it did so well.
TUF creates value for itself
Certainly, luck had a role to play, but the fundamental reason is what was singled out in the original report:
Over the last few years, TUF has made some very tactical acquisitions. These companies have all been related to TUF’s existing business while also offering benefits – whether it’s potential for economies of scale, transition of technology, production know-how, information of raw material procurement, and sales and distribution.
Unlike its many Asian counterparts, TUF knows how to create value for itself.
Over the last 13 years, TUF has continued gobbling up assets, acquiring about one a year. In that time, it has transformed into the “world’s seafood expert” – the largest canned tuna processor in the world, and the largest seafood company in the world by sales value ($3.4bn in 2013).
Most Western consumers know TUF through its ownership of leading brands such as John West, Petit Navire, and Parmentier in Europe, and Century in China.
And now it’s buying two more assets.
These two new acquisitions could send the share price up
In September, TUF bought King Oscar Holding AS, a Norwegian-based company with a strong brand name in Europe, the US and Australia. King Oscar is considered one of the top ten strongest seafood brands in the world.
I have a strong personal relationship to that brand. King Oscar refers to a Swedish King who ruled Sweden and Norway in the late 19th century. I can recall growing up in Sweden with King Oscar as a strong household name.
King Oscar Holding has two production facilities in Poland and Norway with 500 employees, and the management is expected to continue to manage the company as a subsidiary of TUF.
While transaction details have not been disclosed, King Oscar generated $800m in sales and an Ebitda (earnings before interest, tax, depreciation and amortisation) margin of 12% in 2013. Sales have been growing by around 6% per year over the last five years.
And most importantly, the Ebitda margin is much higher than TUF’s Ebitda margin of 8-9%. This deal is expected to be concluded in 4Q14.
Meanwhile, just a few weeks ago, TUF announced it would buy France-based smoked-salmon producer MerAlliance.
In the fiscal year ended 31 March, MerAlliance generated $220m in sales. It is the fourth largest smoked-salmon producer in Europe and has production facilities in France, Poland and Scotland. No further details of the deal were released.
After these two transactions, TUF’s management believes the net gearing will remain at 0.8 times.
All well and good, but what does the market think of TUF?
Why TUF is one-in-a-million
I guess the rarity premium helps to explain TUF’s premium valuation.
There are 27 analysts covering the stock, of which 26 rate it as a ‘buy’. Based on their numbers, TUF is trading on a price/earnings ratio of 19.5 times 2014 earnings, price to earnings growth ratio of 0.7 times and a dividend yield of 2.6%.
Some Thai seafood companies have received mixed press. It seems to be a lesser concern of TUF’s as it is the first Thai food company to be recognised as a member of the Dow Jones Sustainability Emerging Markets Index in 2014.
A company with the knack of continuously creating value is rare, particularly in emerging Asia. If TUF continues its streak as a valuable asset acquirer, I think it is fair to assume the share price will rise higher.