Omicron has cut a swathe through Ingham’s staff causing disruption to all facets of the business. In addition, feed costs have risen in recent months. The combination will lead to consensus earnings downgrades for FY22 and we have consequently lowered our recommendation to Hold.
ING employs more than 8,000 people across its complex, high volume supply chain in Australia and New Zealand. Given the rapid increase in COVID-19 cases since mid-December 2021, the business has been hit with an adverse sales mix and higher costs per kg due to staff absences.
All of ING’s Australian sites are operational, but significantly lower levels of staff availability are affecting production volumes and operational efficiency. The company is facing higher costs from additional protective equipment, testing of staff and higher freight and distribution costs. ING is also producing more basic products and less value-add products due to the staff shortages. ING also has lower sales in non-supermarket channels where the price per kg is higher.
The Federal and State governments have moved to change the isolation rules for close contacts which may alleviate some of the staff shortages and help to normalise the situation sooner than expected.
Rising feed costs have added to the earnings problem with Nov-Dec 2021 costs increasing 12-14%. ING purchases feed anywhere between 3-9 months ahead and it is possible the company’s hedges have not worked in its favour. We previously anticipated a 10% fall in feed costs but now think this could turn out to be a small increase instead for FY22f.
Investment view
Consensus earnings forecasts have been trimmed following the company update, but we think this is insufficient to reflect the likely outcome for FY22f. We acknowledge that the company has not provided any guidance mainly due to the uncertainty of the duration of the impacts. The anecdotal evidence is hard to ignore with near-empty shelves at supermarkets and fast food outlets (KFC and McDonald’s) publicly discussing the impacts on their businesses.
The cost of feed is one of ING’s main earnings risks, along with changes in demand profile and capex requirements in a high volume industry.
The COVID impacts are likely to be transient, but other cost pressures may be more enduring and could lower ING’s long term margin outcomes. The industry structure remains favourable with rational pricing and good capacity utilisation.
Our previous assumptions of margin expansion and softer feed prices have been challenged and we now reflect this by lowering our recommendation to Hold.
