Result overview:
Underlying EBITDA +36% to $183.6m
Core poultry (human consumption) volume stable at 463kt, prices +13% Australia, +14% New Zealand (+11% in AUD terms)
FY23 result. Much higher poultry prices (group +12.8%) in FY23 in response to higher input costs, and tighter supply/demand conditions. The core poultry net selling price in Australia lifted from $5.31/kg in FY22 to $6.00/kg in FY23. By channel, a recovery in retail took volume back from wholesale outlets while Quick Service Restaurant demand was more subdued. Wholesale channels remained robust despite the shift to retail, which supported price increases.
ING’s 2H23 outcome was very strong with margins recovering 260bp due to the price-driven growth in sales. The core poultry price per kg in Australia increased 17.5% in 2H23. This will support double digit revenue growth for core poultry again in 1H24. Volumes should also lift as bird yields have begun to improve and some additional hatchery production capacity has been added.
Outlook. The structurally higher price of red meat continues to advantage cheaper poultry in a soft consumer environment.
Price increases will continue through FY24, pumping up sales and boosting margin back towards pre-COVID levels. Price growth should also outstrip cost growth as feed costs appear headed for a ~4% fall. This will clearly benefit margin expansion as feed costs represent about one third of the cost of sales. After increasing by 27% in FY23, feed costs have plenty of scope to fall further.
Production disruptions experienced in FY23 are now fixed and this should allow better volume growth just as the company sees demand picking up. Long term volume growth has been 2-3% pa.
The same earnings improvement trends are appearing in New Zealand. The operational challenges from 1H23 are beginning to turn around.
Investment View
Chicken will be on the dinner table Monday to Friday as it continues to be the protein of choice in budget-pressured households.
Price rises are the foundation for an earnings recovery for ING, assisted by gradually falling costs resulting in improving margins. ING has good operating leverage to higher prices and improved productivity so investors should expect to see double digit EPS growth over the next two years and higher operating margins.
At 14x FY24 PER, the unfolding earnings recovery is not fully captured in the share price. The additional support of a chunky net dividend yield near 5% could be enough to lure investors.
Risks to Investment View
Feed cost changes of 10% would impact EPS by about 10%. Chicken production typically takes 10-12 weeks so changes in 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 changed our recommendation to Buy from Hold.
