1 RESEARCH NOTE Inghams Group Neutral Price: A$3.50 Price Target: A$3.75 ASX: ING 25 August 2017 Inghams Group (ING) FY17 results were slightly ahead of prospectus forecast driven by the Australian segment but offset by the New Zealand Segment (albeit improving in 2H17 and expected to continue into FY18). FY17 results were above prospectus due to (1) higher than forecasted poultry volumes; and (2) cost saving initiatives via Project Accelerate. The result was partially offset by (1) lower feed volumes; and (2) changes to poultry sales mix. Management did not give specific quantitative guidance for FY18, but instead qualitative guidance which we interpret as expect at-trend growth in Australian poultry volumes and higher EBITDA margins from cost saving initiatives (Project Accelerate) whilst the NZ market improves. ING trades at a discount to our valuation and decent value on 12.1x one year forward price to earnings and 5.8% dividend yield. We remain vigilant over private equity sell down and prefer a longer track record as a listed entity we cautiously maintain our Neutral recommendation. Results ahead of prospectus forecast. ING reported revenues of A$2,383.9m, +0.4% higher than prospectus forecasts, EBITDA of A$195.0m, +2.6% above prospectus forecasts, and FY17 dividend per share of 12.1 cents. This was driven by (1) higher than forecasted poultry volumes; and (2) cost saving initiatives via Project Accelerate helping ING maintain EBITDA margins inline with prospectus (or better than the ~7% in FY16). The result was partially offset by (1) lower feed volumes; and (2) changes to poultry sales mix.
2 Australian segment strong demand outstripping supply. Revenue from the Australian segment was +1.0% higher than prospectus forecast and EBITDA was +3.7% above prospectus forecasts. The higher revenue result was driven by poultry volumes. On a positive note, ING had trouble handling the strong growth in volumes, which led to higher clearance volumes (at lower margins) and which had to be accommodated with extended work hours for the existing workforce. ING also had to turn away customers as they did not have capacity to meet demand, and in FY18 management hopes to meet the current volume growth. EBITDA growth was due to cost savings achieved through Project Accelerate. New Zealand segment a poor result below prospectus forecasts. Revenues were at A$361.30m, -2.8% lower than prospectus forecasts due to difficult trading conditions. Management did note that conditions improved in 2H17 and in FY18 to date. Results were also improved by free range sales and the commencement of exports. Balance sheet position improved. As a result of higher cash generation from operations, working capital improvements, and cash from property sales, pro forma net debt was reduced and the leverage ratio is now 1.5x compared to 2.2x in FY16. Capital expenditure and profitability initiatives. ING is focused on capacity expansion with the completed expansion of the Murraylands hatchery and the completed Monarto breeder farm complex in South Australia. Other work in progress capital initiatives include additional breeder capacity at Yumali (SA) and construction of a new SA feedmill. FY18 Outlook sales to follow trend levels. Australian poultry volumes are expected to grow more closely aligned with historical trends (3.5% to 4%), and improvements in New Zealand segment in 2H17 to continue into FY18. ING expects to conduct more asset sales to improve cash flow, reduce debt and offset costs of restructuring initiatives. Cost pressures have been affecting the industry with feed and electricity prices increasing. At the analyst call, management called out that these cost increases had been mitigated somewhat by a 3% increase in prices, which have been absorbed by ING s customers. Increases in feed prices are expected to be mitigated through forward cover arrangements (of approximately 9 months). ING has longer term supply contracts for electricity until 2H18, and so should
3 not feel the impacts of electricity price increases until then. The benefits from Project Accelerate, energy efficiency initiatives and recovery of costs via market pricing is expected to offset electricity price increases. ING s smaller competitors would only have cover arrangements for 2-3 months and so would be increasing prices much sooner. Indeed, management noted that in recent weeks the market has seen price increases off the back of increasing costs. FIGURE 1: ING REVENUE BY REGION Investment Thesis We rate ING as a Neutral for the following reasons: ING trades at discount to our DCF based valuation and price target and presents value on multiples of 12.1x one-year price to earnings and 5.8% dividend yield. Short term track record operating as a listed entity. Australia and New Zealand s largest integrated poultry producer. Expecting volume growth inline with historical levels in Australia, improving conditions in NZ and initiated exports of Waitoa premium product to Hong Kong. Review of commercial stock feed business (third party feed sales) commencing.
4 Elevated capex levels in FY17 are expected to reduce. Further asset sales expected to solidify balance sheet. Project Accelerate (cost out program) to drive automation and labour productivity, which should be supportive of earnings margin improvements. Procurement initiatives implemented with benefits in line with expectation. Investing to increase capacity and capability across the business in Australia and New Zealand plants. Key Risks We see the following key risks to our investment thesis: ~47% of the shares are still owned by pre-ipo owners Private Equity group TPG who we believe will look to liquidate position in periods of strong share price performance causing selling pressure. ~178.8m shares were released from escrow arrangements on 22 August 2017. Re-negotiation of key contracts with large customers on unfavourable terms. With supermarkets are under pressure to reduce prices due to competition, it is likely they will look to pass as much of the burden on to their suppliers, which will be negative for ING. Susceptible to exotic disease breakouts, impacting ING s ability to supply poultry products. Significant reduction in volume and quality from parent stock supplier. Material interruptions to ING s complex and interlinked supply chain. Increase in feed and electricity costs (especially if higher than price increases pushed to customers as a result). Company Description Inghams Group Ltd (ING) is Australia and New Zealand s largest integrated poultry producer. The Company produces and sells
5 chicken, turkey and stock feed that is used by the poultry, pig, dairy and equine industries. FY17 Financial Results The figure below presents key FY17 numbers. FIGURE 2: ING FY17 RESULTS SUMMARY By segment FIGURE 3: AUSTRALIA SUMMARY
6 FIGURE 4: NEW ZEALAND SUMMARY FIGURE 5: ING FINANCIAL SUMMARY
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