1 March 2020
|Date of Report||ASX||Price||Price Target||Analyst Recommendation|
|Date of Report|
|Sector : Consumer Staples||52-Week Range: A$3.25 – 4.10|
|Industry: Food Products||Market Cap: A$1,429.7m|
We rate ING as a Neutral for the following reasons:
- Undemanding valuation and attractive dividend yield.
- Short term track record operating as a listed entity.
- Australia and New Zealand’s largest integrated poultry producer.
- Further asset sales expected to solidify balance sheet.
- Project Accelerate has proven successful in driving automation and labour productivity, which supports earnings uplift despite decrease in revenue.
- Procurement initiatives implemented with benefits in line with expectation.
- Investing to increase capacity and capability across the business in Australia and New Zealand plants.
- Capital management initiatives high on the agenda with a strong balance sheet (ING likely to declare an on-market buyback of up to 5% of issued capital).
We see the following key risks to our investment thesis:
- Re-negotiation of key contracts with large customers on unfavourable terms.
- Cost pressures (utilities and feed).
- No news on the appointment of a new CEO creates uncertainty.
- 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, which may be pushed to customers through market price increases, reducing competitiveness.
Overall, in our view, Inghams Group (ING) reported a solid FY18 result, with much of the ongoing investment debate focused on the quantum of cost increases in FY19.
This largely overshadowed the capital management initiatives the Company announced, with the board approving capital return of $125m to shareholders (or 33cps – expected timing Dec18 or Jan19). Further, with the sale of Mitavite expected to complete in the fourth quarter of 2018, the Board intends to initiate an on-market share buyback of up to 5% of issued capital.
With respect to the results, underlying EBITDA (excluding asset sale and restructuring charges) of $208.9m was below market estimates of $213.0m and up +7.1% on pcp.
We maintain our Neutral recommendations as we see a number of challenges for the Company in the near-term: 1. Costs out remain on track but are now coming to a completion; 2. energy and feed cost pressures are expected to continue in FY19; 3. higher tax rate; 4. New Zealand remains a challenge (excess capacity remains); and 5. No update on the CEO leads to further uncertainty.
So why Neutral? The Company retains a strong balance sheet with capital management on the agenda in the near-term (potential of an on-market buy-back likely to provide some share price support) and trading on reasonable valuation of 13.3x FY19 PE-multiple and yield of ~5%.
- Earnings. Underlying EBITDA was up +7.1% to $208.9m, which excludes the benefits from asset sale and restructuring. Underlying NPAT was up +12.4% on pcp, however this was assisted by a lower effective tax rate and lower net financing costs (due to higher cash balances). Headline EBITDA of $212m saw a net benefit with asset sales ($19.4m) more than offsetting restructuring costs ($16.3m).
- Cash flow. Cash flow was solid, with operating cash conversion excluding inventory financing was 112.1%. Headline operating cash conversion of 122.9% benefited from inventory financing benefit of $23m.
- Gearing. Net debt declined to $145m, with gearing reducing to 0.7x (ND/EBITDA), driven by improved cash flow and proceeds from asset sale.
- Capital management. Given the strong gearing position and current cash on the balance sheet, management has announced capital return of $125m (equivalent to 33cps). Further, with the impending sale of Mitavite in fourth quarter CY18, the Board also intends on proceeding with an on-market buyback of up to 5% of issued capital.
- Outlook. Management provided the following outlook comments: 1. Expect demand for poultry products to grow, as inflationary pressures (i.e. higher prices) are being felt across all protein categories. Hence expect poultry to retain its “relative” attractiveness. 2. Cost pressures in the form of higher energy prices and feed costs, are expected to continue. Management will try to offset these via pass-through to the customers when necessary. 3. NZ is expected to remain challenging in FY19. 4. Expect a higher effective tax rate in FY19 (29% vs. 24.4% in FY18) due to changes in NZ tax legislation%.
Figure 1: FY18 P&L summary
Figure 2: ING Financial Summary
Source: BTIG, Company (pro forma numbers), Bloomberg
Inghams Group Ltd (ING) is Australia and New Zealand’s largest integrated poultry producer. The Company produces and sells chicken, turkey and stock feed that is used by the poultry, pig, dairy and equine industries.