The trading update from Inghams confirms that the tough circumstances evident at the interim result in February may have worsened.
ING’s trading update revealed that 2H22f earnings have been “seriously impacted by the on-going effects of the COVID-19 Omicron outbreak, natural disasters and higher feed costs”.
The company noted the large Australian wheat harvest in 2Q22 had been hoovered up by exports at record levels. Wheat and other feed costs are rising due to volatility in international markets. Altogether, we think ING is facing 30% higher feed costs by the end of calendar 2022. Transport costs are also rising, and at 6% of total costs, this factor will also weigh on earnings.
The problems on staff absenteeism and availability due to the Omicron spike will eventually pass, but this has already left its mark on FY22f earnings.
Investment view
Consensus earnings forecasts currently expect a 13% decline in FY22f EBITDA, and a 41% fall in net profit after tax. We already knew from the 1H22 commentary that underlying EBITDA and net profit for the first 7 weeks of 2H22 were down $34 million and $24 million respectively, compared to last year.
The company was losing money in the first few months of the half, and we only assume a return to a normal run-rate by around June this year. There is a risk that higher feed and transport costs could persist for longer than expected, delaying an earnings recovery.
If ING was to pay a final dividend of 6.5cps, that could push its net debt to EBITDA ratio above its target range of 1-2x. For this reason, we think the company might consider not paying a final dividend this year.
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.
