The story of Thai Union Group Public Company (SET: TU)’s decision to record 18 billion baht of impairment instead of dragging a dead-weight Red Lobster hoping it will be profitable one day is a good example of why stock markets hate uncertainties.
On paper, 18 billion baht seems like a lot of money but that is a non-cash impairment charge to be booked in the fourth quarter of 2023 financial statement as a one-off item. The move came at a time that TU’s executives consider its financial status to be quite strong and the impairment will not cause any material adverse effect on the business operation, assets or financial conditions.
The market responded positively right off the bat on Wednesday with TU’s share price finishing 2.7% higher and continued to extend gains in the following session.
This shows that the market can bear to see a heavy loss for a quarter than seeing the poor performance from Red Lobster eating hard-earned profits of Thai Union. JP Morgan wrote in a note saying that this cut will allow TU to be able to book profit from 2024 onward.
The company is still in a good position with more than 36 billion baht of retained earnings that could offset impairment from Red Lobster and still have 18 billion baht left in its pocket. This erased concerns from investors that worry about omission of dividend payment, though several procedures must be done first for this case.
Thai Union will finally be free of shouldering a huge burden from Red Lobster that records about a billion baht of net loss every year. This has led to a positive sentiment in the Thai stock market as analysts recommended “BUY” on TU with a target price as high as THB20.30 per share.
An investment in Red Lobster is not a mistake by the Thai Union. It is a good restaurant and both can benefit from each other’s businesses. It is just the timing that is not favourable to Thai Union, especially after Covid-19 pandemic.