Inghams is fighting a torrid battle against staff absenteeism (Omicron), higher feed costs and supply chain issues. FY22 earnings are therefore doomed. But the disruptions are all likely to be temporary in nature so earnings will eventually recover.
ING’s 1H22 EBITDA of $220.4 million was 2.2% ahead of last year which was commendable given the lockdown impacts on several aspects of the business.
Volumes have been the exception with core poultry volumes increasing 5.6% against price decreases of 2.7%. The Wholesale sector experienced excess supply across the whole market.
Feed costs are ING’s largest input cost (about 34% of total cost of sales) and although wheat prices have been below the highs seen in 2019, grain prices generally are beginning to rise.
The timing of wheat purchases and soymeal can influence the actual outcome. Rising feed costs will dig into FY23f earnings and we think the company will need a 2.5% price rise to offset this cost inflation. The three main ingredients used in chook feed are wheat, soymeal and barley. ING typically purchases anywhere from 3-9 months ahead and its inventory position increased $45 million in the half. The company said its feed inventory was up $46 million indicating it is more hedged than usual on feed costs at the moment.
Capex in 1H22 was $24 million, well down on the level from two years ago. Both maintenance and growth capex is behind target levels, partly due to COVID-19 interference. We expect capex to lift from $56 million in FY22f to $84 million in FY23f.
Investment view
The second half year is going to be even tougher for ING. Underlying EBITDA and net profit for the first 7 weeks of 2H22 are approximately $35 million and $24 million respectively lower than last year.
On-going, extensive staff shortages (ING employs more than 8,000 staff) across all major locations are limiting the company’s ability to process in the formats and volumes required by retail and QSR chains. The over-supplied wholesale market is also hurting earnings.
We think 2H22f EBITDA could be down by more than 20%.
Once the short term cost factors are overcome, ING will be facing rising grain prices heading into FY23f.
The industry structure in Australia and New Zealand is favourable with rational pricing and capacity utilisation. Unfortunately, ING has just not been able to catch a break with earnings being volatile in recent years from COVID-19 and sundry other factors.
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.
