ING wore a difficult year with 2H22 earnings down 68%. FY22 underlying EBITDA fell 15% to $380.8 million as residual COVID-19 impacts were meaningful and feed and fuel costs were up significantly. Against all this, poultry volumes increased 4.2% helping group revenue to lift by 1.7% to just over $2.7 billion. Those higher feed costs and operating costs are likely to hang about in 1H23f so we are expecting 1H23f earnings to fall. There is a chance that net debt to EBITDA rises above 2.0x so the interim dividend is under threat.
Australian revenue increased 1.7% assisted by a 5.2% increase in poultry volume offset by a 3.5% price decline from the mix shift to wholesale. The wholesale shift was partly due to COVID-19 playing havoc with labour supply in the company’s processing operations that necessitated a simpler range of products.
Investment view
It could be said that all ING’s chickens came home to roost over the last two years. The impacts on operations from COVID-19 restrictions, floods, supply chain issues, and labour shortages combined to pluck ING’s earnings and crunch margins. ING’s price per kg and gross margin in Australia fell by 3% and 309bp in FY22. The price per kg in New Zealand went up by 5% but COGS rose even faster to skewer gross margin by -393bp. ING said pricing in June had recovered significantly to be up ~2% compared to a year ago. The bigger challenge is how to combat the higher COGS – higher feed, wages, fuel and energy costs are not going away this year.
ING’s feed costs alone could rise 20% in FY23f as both wheat and soymeal prices are at ten-year highs. This could take a $120 million bite out of FY23f earnings and requires a 4% price rise to neutralise the impact.
Debt levels have now also become an issue of importance, loitering at the top end of the company’s preferred gearing range. The interim dividend could be a casualty in order to keep gearing levels within desired boundaries.
Many of the most acute problems have now passed, but it is not safe for ING to cross the road, figuratively speaking. Margins can realistically recover to 7% but anything more would require new product development and further production efficiencies.
ING’s share price is down 23% since the beginning of the year and while there is reason to believe it can recover, it may not be in FY23f.
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.
FIGURE 1: FY22 RESULT
FIGURE 2: VOLUMES
