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Investors shaken by cost of Chicken of the Sea's price-fixing settlement

The numbers took away confidence in what was otherwise a solid second quarter, analysts told IntraFish.

Thai Union's strong second quarter earnings may have helped soften the blow of the steep cost the company paid to settle the long-running tuna price-fixing case, but the final bill was "definitely a surprise," Thai Union analysts told IntraFish.

The company reported in its second quarter that accrued fees paid out via US subsidiary Chicken of the Sea reached THB 1.858 billion (€53.8 million/$60.3 million), "substantially higher than originally anticipated." The settlements dragged the subsidiary to an operating loss of THB 288 million (€8.3 million/$9.4 million).

In the second quarter of 2018, Chicken of the Sea recorded a $44 million (€38.1 million) one-time accrual to reflect potential risks. The company had then communicated that the financial impact of this legal issue would be covered for the next few years, analysts said.

Last year, the company settled with Walmart and several other plaintiffs, a Thai Union spokesperson told IntraFish. "Early this year, the discussion with later plaintiffs yielded different terms than we anticipated, thus letting us reassess the overall risk and accruing more for the case."

The spokesperson also stated that the company does not see "any material risk for additional accrual in the future."

Analysts estimate that around 75-80 percent of costs related to plaintiffs have been dealt with.

"The CEO confirmed that they don’t expect additional expenses in the future, but as the case is still undergoing, it will take six to nine months before it’s legally settled," Nantika Wiangphoem, an analyst under DBS Vickers Securities, told IntraFish.

"The stock price dropped by three to four percent yesterday afternoon, hours after the result came out," Wiangphoem said. "I think we should see a quick recovery in share price, because if we strip out these extra expenses the company is quite strong. They are actually doing better than market expectations, but the panic is happening through the market because the bottom-line was far below the estimation and it wasn't communicated beforehand."

c8e8b1bf11660e268da3b20c10a9d6ec Thai Union share prices showing a steep dip on Aug. 6. Photo: Bloomberg

The company's earnings before interest, tax, depreciation and amortization (EBITDA) in the second quarter was near THB 3.3 billion (€95.6 million/$107.1 million), showing 15 percent growth year-on-year. However, these figures exclude the impact of the accrual.

Despite a drop in overall sales, sales in the US appear to be stable, and analysts don't expect the case to affect the company's overall business position in the market.

Cost margins are high at roughly 16 percent due to falling tuna prices, which helped balance with the drop in sales volume.

"The company said that they will be more aggressive with sales, because they want to balance profitability with sales volume. They need to optimize the margins," Sirimi Dissara, an analyst under SCB Securities, told IntraFish.

Orders from private labels have reportedly been stalled, as the original equipment manufacturers (OEM) wait for prices to stabilize. Dissara expects this year's overall volume will increase once orders from OEMs pick up.

"It depends on the market expectations, but the price hit the lowest in June, and even a small increase in the price should increase the sentiment of the buyers," she said. "Prices usually increase towards the end of the year."

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