Inghams operational efficiency saves the day

This story features INGHAMS GROUP LIMITED. For more information SHARING ANALYSIS: ING

The strong recovery in Inghams Group earnings expected is linked to improving market conditions and a concerted attempt to improve operational efficiency

– Profit forecasts are ahead of consensus
-The average price of chicken increased by 12% in 2H21
-Management has identified more than 250 improvement opportunities
-More higher margin products expected

By Mark Story

The covid pandemic has arguably brought mixed blessings for poultry processor Inghams Group ((ING)). As additional demand for its chicken, turkey and plant protein products came from people hoarding food, it was offset by restrictions and restaurant closures. As a result, management did not apologize, explaining that running the company through a year of fickle and unpredictable demand has been tricky.

Following improved business conditions, as the impact of covid restrictions fades and operational efficiency increases group margins, this week’s first fiscal year 21 profit forecast was ahead of schedule. expectations of consensus. As a result, brokers believe Inghams’ fundamentals are attractive and have revised their guidance to reflect a strong recovery in earnings.

While the uncertainty surrounding Victoria’s current lockdown is not reflected in the management update, forecasts suggest underlying earnings are expected to be $ 203-213 million and underlying net earnings should be $ 96-103 million.

As Inghams expands customer relationships in wholesale, which accounts for 8% of revenue, management has identified the reduction in international tourism as a persistent headwind. However, Inghams also expects export volumes to slowly increase as foreign markets reopen.

Inghams had yet to provide guidance for FY21, but pointed to the typical asymmetry in its profits between the first half and second half of 52/48%. The stronger relative first half reflects strong demand for poultry over the summer period, while demand for turkey is skewed towards the Christmas period.

Operational efficiency

Macquarie believes that the best updated guidance from Inghams reflects both the benefits derived from operational efficiencies implemented throughout the year and the improvement in trading conditions as the impact of the restrictions increases. of covid gradually decreases.

In early May, Inghams noted that core poultry volumes for the third quarter of 2021 were slightly lower than the previous period due to the cycle of a period that benefited from the filling of the Covid pantry. Management also noted that slightly lower volumes in the third quarter were offset by operational efficiency and improved net feed costs, which are positive for profit margins.

Based on Inghams’ forecast of efficiencies implemented throughout the year, Credit Suisse suspects that they have not only resulted in further improvement in margins, but are also the main contributor to the forecast for the year. exercise 21 that were ahead of the consensus.

Due to growing delivery evidence on expected margin expansion, Credit Suisse believes demand trends remain positive, with input feed costs likely to provide a relative tailwind during FY22.

In Macquarie’s view, higher margin channels improve as covid restrictions relax. The broker notes that the average price of chicken across the entire commodity chain has increased 12% in the second half of 2021 to date compared to the previous period and up 5% sequentially from the first half of 2021. Overall, Macquarie is forecasting FY21 net income 5% up from the broker’s previous. provide.

Morgans also expects the fourth quarter of 2021 to have benefited from lower grain costs. The broker notes that the company previously said FY 22 will see both a full year of lower grain prices and additional efficiency benefits from recent growth initiatives, including new hatcheries. from Victoria and WA.

Inghams previously highlighted how its continuous improvement program ensures cost savings with minimal capital required, and over 250 improvement opportunities have been identified.

Over time, the company is expected to expand its product offering to include higher margin products. With beef prices remaining at record highs, Morgans expects solid volume growth given chicken is the affordable protein.

Resumption of normal trade & tax credits

While the impacts of restrictions on international tourism in A&NZ were still felt with the last Inghams update in May, management advice suggests that the volume on the restaurant channel, which accounts for 8% of revenues, has now largely returned to pre-covid levels.

Chicken nuggets and value-added products have grown by 29% and 18% respectively on average in the second half of 2021 to date year on year. While local lockdowns have had minimal impact on the retail channel, which accounts for 53% of revenue, Macquarie notes that consumer buying behavior continues to normalize.

Future profits will also be aided by the expected receipt of an R&D tax credit and although this will reduce Inghams’ tax rate, it remains to be qualified.

Macquarie assumes it will be more significant in FY21 given the need for management to disclose it in the company update. Macquarie reduced the effective tax rate assumption to 27.6% in FY21, down from 29.1% previously.

While the R&D tax credit has typically been $ 0.3 million to $ 0.6 million per year between FY 2017 and FY20, Morgans considers the maximum benefit to be $ 8.5 million. of dollars.

Credit Suisse, Morgans, Macquarie and Cit – four of the six FNArena brokers to cover the business – all have buy recommendations (or equivalent) on Inghams.

After the forecast changes, Morgans’ blended valuation fell from $ 4.10 to $ 4.27. The broker expects the main catalysts for the action to include the FY 21 result, further weakness in grain prices and the resignation of Woolworths contracts (the firm’s biggest client) with no negative impact.

In comparison, Credit Suisse and Macquarie have a target price of $ 4.10 and $ 3.98 respectively.

Credit Suisse remains of the view that Inghams offers a positive growth path in the face of undemanding valuation. Macquarie also notes, based on 13x FY21 earnings, Inghams is trading at an attractive -27% discount to its peers.

The consensus target on Inghams is $ 3.97, which suggests a 13.2% rise from the current price.

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