EUR 850.00 For Business Accounts Only

Morningstar | Rising Input Costs Likely to Remain a Headwind for Inghams

Shares in Inghams are overvalued relative to our unchanged AUD 3.50 per share fair value estimate. We believe the market is overly optimistic about the likelihood Ingham’s will be retain the expected margin gains, following the ongoing cost-cutting program. Whilst we project the company to extract efficiencies in the near term, the intense competition from rival Baiada, exacerbated by the relatively weak bargaining position with supermarkets Coles and Woolworths, will limit the upside. These are the main factors behind the no-moat rating, and while excess returns on capital are likely in the near term, over the long run these are likely to be eroded towards the firm’s estimated 9% cost of capital.

We forecast elevated feed, energy, and fuel prices to remain earnings headwinds in the near term. While 60% of Australian volume is covered by feed pass through mechanism, the remainder will need to be offset through cost savings. Consequently, we forecast EBITDA margins flat at around 9% in fiscal 2019. We expect the ongoing transformation program to lift margins to just over 10% by fiscal 2022, we believe this is unsustainably over the long run, and likely to be competed back towards 9%.

We’ve lowered our fiscal 2019 earnings per share estimate by around 6% to reflect the ongoing oversupply in New Zealand (and consequential pricing pressure), cost pressures, along with a higher tax rate. However, the impact on our long-term projections and our valuation are negligible. We continue to project mid-single-digit earnings per share growth on average during the next five years. Our projections are underpinned by steady population growth, and modest growth in poultry consumption per capita, mainly reflecting chicken’s attractive price relative to other proteins, albeit at a modest pace of around 1%-2% per year.

The balance sheet is in reasonable shape, with net debt/EBITDA likely to hover at around 1 for the next few years. Although a series of sizable asset-sales and lease-backs have resulted in considerably higher lease adjusted net debt/EBITDAR which will remain at around 3 times on average. While this is not alarming, it is something we will continue to monitor closely. In any case, the company recently returned AUD 125 Million (AUD 0.33 per ordinary share) of capital to shareholders, which signals management confidence in the firm’s financial health.