Inghams Group has put a difficult FY22 behind it, but the current financial year is unlikely to be cordon bleu. The earnings recovery is dependent on the direction of very high feed costs and the company’s ability to lift prices to offset it. Fuel and labour issues have not dissipated either.
High input costs continue to hamper ING’s earnings recovery. Wheat and soybean meal, two of the more important feed inputs, are 51% higher than a year ago. Labour, fertiliser and transport costs are major inputs to growing these crops and all remain under pressure for various reasons. Feed costs account for approximately 30% of total group costs.
Wet weather is affecting crop harvests and yields. Russian exports, which account for ~17% of global wheat exports, are uncertain. There is some hope that La Nina conditions may be easing, and global inventories are not far below historical averages. Feed costs, therefore, may be peaking but will be a significant factor in the FY23f result.
ING has been able to increase prices to varying degrees in recent months, particularly to supermarkets. Wholesale prices appear to have recouped some of the discount to retail prices. It may be enough to offset the existing levels of input costs, but further price increases will be needed unless wheat and soybean prices begin to fall.
The company’s strategy, network and capital plan is leaning even more heavily on partnerships with its major customers. The plan is clear enough, but the details continue to be sparse.
Sales volumes in the first quarter of the year have been soft, partly due to ING’s own customer service levels.
Investment View
CEO Andrew Reeves reminded shareholders at the Annual General Meeting of chicken’s advantage as the cheapest protein amongst the land-based alternatives. This is true but the steady long term growth of the chicken market does not alone determine the profitability of its participants.
The short term prognosis depends heavily on the cost of feed inputs normalising from current elevated levels. There is no certainty this will transpire which leaves consensus forecasts for FY23f exposed to further changes.
The outlook for ING’s earnings is not all bad, but we prefer to remain cautious as so much of the recovery is out of the company’s hands.
Risks To Investment View
Feed cost changes of 10% would impact EPS by about 10%. Chicken production typically takes 10-12 weeks so changes to future demand take time to adjust to. The industry is experiencing annual volume growth of about 4% requiring periodic amounts of capex to increase capacity.
Recommendation
We have retained our Hold recommendation.
