Company Reports

We forecast Inghams' top line growth to be driven by population growth and some per-capita increases in chicken consumption, aided by process enhancements and further improvements in the feed conversion ratio for chicken. Despite Inghams' dominant market share, and the industry's duopolylike structure, competition in poultry is intense. Poultry is largely commoditized, and Inghams possesses limited opportunity to differentiate its products, leading to our view that the firm lacks a long-lasting competitive advantage required to award an economic moat. Further, Inghams' customer base is highly concentrated, with around 60% of sales comprising five customers, including supermarket giants Woolworths and Coles, and quick-service restaurant KFC. In our view, the balance of power lies firmly with these key customers.

Inghams’ fiscal 2024 result was a considerable improvement on fiscal 2023, with underlying net profit lifting 43% to AUD 102 million—about 6% below our forecast. Net selling prices lifted across all channels, about 5% on average, much of it a consequence of higher costs flowing through. Feed prices remain elevated, albeit moderating from recent record highs. Labor, utilities, ingredients, and maintenance costs have all increased ahead of general inflation. Commensurate price increases—which are notoriously slow to respond—are beginning to flow through.

Avian influenza, or bird flu, has been detected in Australia at a two egg farms, one in western Sydney in New South Wales and one in the Meredith area of Victoria. None of Inghams’ farms has been affected directly, and Inghams has no commercial broiler farms located in either affected region. Consequently, save for increased biosecurity measures in New South Wales and Victoria—including restricting access to livestock and processing operations, Inghams is operating as usual, and its supply chain is unaffected. We maintain our AUD 3.70 fair value estimate. At current prices, shares in Inghams are roughly fairly valued.

No-moat Inghams is enjoying a positive start to fiscal 2024. Conditions are favorable, with core poultry volumes and net selling prices up. Revenue growth is also outpacing input cost inflation, notably feed costs, which appear to have stabilized. First-half underlying EBITDA rose 20% on the previous corresponding period.

We forecast Inghams' top line growth to be driven by population growth and some per-capita increases in chicken consumption, aided by process enhancements and further improvements in the feed conversion ratio for chicken. Despite Inghams' dominant market share, and the industry's duopolylike structure, competition in poultry is intense. Poultry is largely commoditized, and Inghams possesses limited opportunity to differentiate its products, leading to our view that the firm lacks a long-lasting competitive advantage required to award an economic moat. Further, Inghams' customer base is highly concentrated, with the majority of its total sales comprising five customers, including supermarket giants Woolworths and Coles, and quick-service restaurant KFC. In our view, the balance of power lies firmly with these key customers.

Conditions are good for Inghams. At a trading update, the firm noted poultry prices are elevated, demand is strong, and operating performance across farming and processing continues to improve. Pricing momentum enjoyed in fiscal 2023 has continued into fiscal 2024. Average pricing increased quarter on quarter throughout fiscal 2023, with fourth-quarter 2023 average selling prices about 17% above the corresponding quarter in fiscal 2022. Management guided to first-half fiscal 2024 EBITDA of around AUD 247 million—18% higher than the prior corresponding period. While noting a likely weaker second half, due to normal seasonality and inflationary headwinds (particularly in labor), we lift our fiscal 2024 EBTIDA forecast by 19% to AUD 446 million.

We raise our fair value estimate for shares in Inghams by 6% to AUD 3.70 following the release of fiscal 2023 results. Underlying EBITDA lifted 14% on fiscal 2022 to AUD 434 million—about 2% above our forecast. Higher input costs have weighed on Inghams' recent history. Feed prices remain elevated, albeit moderating from recent record highs, and fuel, freight, and ingredients have all increased ahead of general inflation. But commensurate price increases—which are notoriously slow to respond—are beginning to flow through after sharply lower margins in fiscal 2022. Inghams enjoyed higher prices across all channels, with core poultry net selling prices up about 13% in fiscal 2023. But poultry is a highly commoditised product, and Inghams remains a price taker, leading to our no-moat rating.

We think the market's concerns about Inghams are overdone. Granted, input costs—principally labour and feed—are elevated at Inghams, and commensurate price increases are notoriously difficult to achieve. Poultry is highly commoditised, and Inghams is effectively a price-taker, leading to our no-moat rating. Margin pressure has been exacerbated by unfavourable product mix as consumption shifted from restaurants to supermarkets since the pandemic. But we expect headwinds to prove transitory and forecast profitability improving further from fiscal 2024 as more price increases are won and mix shift continues to normalise. At current prices, shares in Inghams screen as attractive compared with our unchanged AUD 3.50 fair value estimate.

Near-term profitability is under pressure at Inghams and Bega. Input costs, notably labour, chicken feed, and milk, are elevated, and the firms have been unable to pass through increased costs in their entirety. Bega and Inghams are both highly reliant on supermarket giants Coles and Woolworths. Together the latter account for about two thirds of food retailing in Australia, and command substantial bargaining power over suppliers. We don't think Inghams or Bega have garnered brand equity sufficient to warrant an economic moat. We think the balance of power lies with the supermarkets, keeping a lid on margins.

We maintain our AUD 3.70 fair value estimate for shares in Inghams following the release of interim fiscal 2022 results. The decrease to our near-term earnings estimates is broadly offset by time value of money. Underlying net profit after tax, or NPAT, was up 6% over the previous corresponding period, or pcp, to AUD 40 million despite a challenging period. The pcp was similarly challenged, with the poultry market in oversupply in early fiscal 2021. The emergence of the omicron variant is weighing heavily on Inghams as labour constraints and demand shifts increased costs and marred manufacturing capability, leading to another oversupply--this time in the wholesale segment--by the end of the half.

We maintain our AUD 3.60 fair value estimate for Inghams following the release of fiscal 2021 guidance on improving operating conditions. We make no changes to our fiscal 2021 NPAT forecast of AUD 87 million, which is at the top end of updated guidance of AUD 80 million to AUD 87 million. While detail on the improving conditions were sparse, the firm flagged strong operational performance and benefits from operational efficiencies delivered during the year, in addition to improving trading conditions on the back of decreased COVID-19 restrictions compared with the first half.

We forecast Inghams returning to earnings growth, with top line driven by population growth and some per-capita increases in chicken consumption, aided by process enhancements and further improvements in the feed conversion ratio for chicken. Despite Inghams' dominant market share, and the industry's duopolylike structure, competition in poultry is intense. Poultry is largely commoditised, and Inghams possesses limited opportunity to differentiate its products, leading to our view that the firm lacks a sustainable competitive advantage required to award an economic moat. Further, Inghams' customer base is highly concentrated, with around 60% of its total sales comprising five customers, including supermarket giants Woolworths and Coles, and quick-service restaurant KFC. In our view, the balance of power lies with these key customers.

We maintain our AUD 3.60 fair value estimate for shares in Inghams following a transition in the firm's leadership. After around two years at the helm, CEO Jim Leighton is stepping down, making way for non-executive director Andrew Reeves to take the reins. Leighton brought extensive experience in the protein and poultry industries to Inghams, with a focus on driving operational improvements and efficiencies. Indeed, under Leighton's tenure, the firm has fixated on operational efficiency and asset optimisation to protect operating margins, with a heightened focus on product development of value-add frozen and ready-to-cook products. Despite the change in personnel, we expect the foundations have been laid for much of the same under Reeves, who has 40 years experience in fast-moving consumer goods and served on the Inghams board since January 2019. We assign Inghams a standard capital allocation rating based on our assessment of balance sheet risk, investment efficacy, and shareholder distribution.

We maintain our AUD 3.60 fair value estimate for shares in Inghams following the release of interim fiscal 2021 results. Net profit after tax, or NPAT, was up 28% over the previous corresponding period to AUD 38 million as demand recovered, oversupply abated, and trading volumes broadly returned to pre-COVID levels. Our long-term forecasts remain broadly intact, and we maintain our fiscal 2021 NPAT forecast of AUD 87 million. The firm declared an interim fully franked dividend of AUD 7.5 cents per share, tracking our unchanged full-year forecast of AUD 16 cents per share. We expect free cash flows to strengthen, supporting our forecast for dividends at the midpoint of the firm's target payout ratio range of 60% to 80% of net profit.

We forecast Inghams returning to earnings growth, with top line driven by population growth and some per-capita increases in chicken consumption, aided by process enhancements and further improvements in the feed conversion ratio for chicken. Despite Inghams' dominant market share, and the industry's duopolylike structure, competition in poultry is intense. Poultry is largely commoditised, and Inghams possesses limited opportunity to differentiate its products, leading to our view that the firm lacks a sustainable competitive advantage required to award an economic moat. Further, Inghams' customer base is highly concentrated, with around 60% of its total sales comprising five customers, including supermarket giants Woolworths and Coles, and quick-service restaurant KFC. In our view, the balance of power lies with these key customers.

We forecast Inghams returning to earnings growth, with top line driven by population growth and some per-capita increases in chicken consumption, aided by process enhancements and further improvements in the feed conversion ratio for chicken. Despite Inghams' dominant market share, and the industry's duopolylike structure, competition in poultry is intense. Poultry is largely commoditised, and Inghams possesses limited opportunity to differentiate its products, leading to our view that the firm lacks a sustainable competitive advantage required to award an economic moat. Further, Inghams' customer base is highly concentrated, with around 60% of its total sales comprising five customers, including supermarket giants Woolworths and Coles, and quick-service restaurant KFC. In our view, the balance of power lies with these key customers.

We anticipate Inghams will face near-term earnings pressure amid elevated feed costs, which we expect the firm is unable to pass through in its entirety, and oversupply issues in New Zealand. Beyond near-term struggles, we forecast Inghams returning to earnings growth, with top line driven by population growth and some per-capita increases in chicken consumption, aided by process enhancements and further improvements in the feed conversion ratio for chicken. However, Inghams' customer base is highly concentrated, and its products highly commoditised, and we do not believe the company has carved an economic moat required to sustainably derive economic profits.

We anticipate Inghams will face near-term earnings pressure amid elevated feed costs, which we expect the firm is unable to pass through in its entirety, and oversupply issues in New Zealand. Beyond near-term struggles, we forecast Inghams returning to earnings growth, with top line driven by population growth and some per-capita increases in chicken consumption, aided by process enhancements and further improvements in the feed conversion ratio for chicken. However, Inghams' customer base is highly concentrated, and its products highly commoditised, and we do not believe the company has carved an economic moat required to sustainably derive economic profits.

We anticipate Inghams will face near-term earnings pressure amid elevated feed costs, which we expect the firm is unable to pass through in its entirety, and oversupply issues in New Zealand. Beyond near-term struggles, we forecast Inghams returning to earnings growth, with top line driven by population growth and some per-capita increases in chicken consumption, aided by process enhancements and further improvements in the feed conversion ratio for chicken. However, Inghams' customer base is highly concentrated, and its products highly commoditised, and we do not believe the company has carved an economic moat required to sustainably derive economic profits.

Inghams two operating segments are poultry and stockfeed, although sales are heavily skewed toward poultry. Poultry includes the production and sale of chicken and turkey products across primary, free range, and other categories. Stockfeed includes the production of stockfeed for use by the poultry, pig, dairy, and equine industries. Approximately 90% of total sales comes from poultry, with the remainder from stockfeed. Within poultry, chicken is the key component, making up approximately 80% of sales.