ING: Can chickens really fly?

Poultry business Inghams (ASX:ING) is well known among many investors. This is because they supply chicken, turkey and plant-based protein products to retail customers, quick service restaurants, foodservice distributors, and wholesale and export channels. Incidentally they are one of the largest producers of stockfeed in Australia.

Starting its business life in 1918, the company has facilities near all major cities across Australia and New Zealand. It has built an extensive network across all aspects of poultry production and auxiliary services. It has done this so that in their words, “reduce biosecurity risks and enables us to leverage our national network to meet our customers’ needs.”

By building out such a network they have created a strong economic moat which is not easy to replicate from scratch. It controls all stages of the chicken production and owns the chickens, the hatcheries, and primary processing plants. It contracts growers who are paid to feed the chickens and provide the sheds and husbandry (broiler farms). After all, no poultry products can be imported into Australia with the exception of certain fully cooked items from New Zealand.

Last year, core poultry volume was 463.5 kilotonnes, a slight rise on the year prior, however revenue rose 12.2% to $3bil and NPAT rose 72.1% to $60.4M. Much of this story however comes from FY2022, when the business experienced significant challenges whereby the business experienced significant challenges.

At the time, they continued to feel the after effects of the COVID-19 pandemic, chronic labour shortages, and floods in New South Wales and Queensland all had a significant impact. It also saw the outbreak of war in Ukraine, which had a significant impact on global fuel and feed prices at the time.

The result was significant supply chain disruption resulting in delays with key packaging and ingredients, transport issues arising both from truck and driver shortages and fuel levy increases due to global price growth, and carbon dioxide supply constraints in both AU and NZ.

But all the work they have put into building their partnerships, and their focus on continuous improvement including automation and plant specialisation has reaped strong results, even as soon as the next year as the FY23 result was materially better than expected, with the second half of the year showing a strong recovery was underway. More in a moment.

Stock Rank

Overall the stock ranks at 97. The strong second half discussed above a key reason for lifting the score from the 80’s into the high 90’s

Quality ranks highly as the Piotroski score is a perfect 9 out of 9. The Return on Equity figure is also quite impressive as are margins and cash flow which recovered after the 2022 blip.

Momentum is also strong following the update, not just after the annual result, but also after the recent quarterly update (more on that under outlook).

Analysts have revised their EPS expectations for ING

And the market has responded in kind with strong relative performance, one of our best over the past 12 months.

From a chart perspective, the price has gone parabolic. It WILL eventually have to settle or pull back. There is little benefit gained trying to catch a rocket in full flight. You're only going to get your hands burnt. Wait for things to settle down and if you like the business, perhaps consider a position then. A support level of $3.63 may be appropriate and hopefully there could be better buying opportunities there. Else it needs to at the very least have some time around these levels first before considering. If it fails to hold that $3.63 level then holding $3.26 will be critical. Note: These levels could change based on what happens to price from this point.

ASX:ING 6 month Daily chart

Value has obviously been impacted by the recent price pop now being at 69. However by no means is this a bad thing because before the FY23 report which showed the improved performance, the value rank was at 53 and the price back then was $2.78. The fact that the Value Rank is now 69 when the price has risen to $3.90 is testimony to the strength of the latest numbers.

StockRank 16th August 2023

Another contributing factor to the improved value performance was the strong second half dividend of 10 cents, its highest since 2019. Quite simply this is a strong sign of confidence from the Board in the company’s outlook.

Outlook

The second half of the FY23 result was evidence enough that a strong earnings recovery is occurring. The 2H23 run-rate bodes well for the strong earnings growth recovery in FY24 / FY25 that we are starting to see.

This was no better captured than in the latest quarterly update provided to market where the company is expecting NPAT to be around $65M for the half year. To provide some context, the last 12 months prior was $60M in total. So they are well on the way to smashing last year’s recovery out of the park.

The company attributed the following factors to the MUCH improved result to:

• Continued improvement in operational performance metrics across farming and processing;

• Strong demand for poultry, with some customers allocating more shelf space to the category;

• Further improvements in Wholesale pricing; and

• Accelerated recovery in New Zealand.

They prudently mentioned that they expect the second half of the year to be slower than this strong rebound would suggest. However as can seen by price and analyst revisions, previous concerns over the operational state of the business are well and truly behind it.

The company feels the business is supported by:

Firstly, the poultry sector remains a growing sector and enjoys a significant affordability

advantage over red meat alternatives. Secondly, the health and versatility benefits of poultry are well established and thirdly, chicken has significant sustainability benefits with poultry having a carbon footprint 5x less than red meat.

Other factors such as a growing population, further productivity gains and strong barriers to entry for competitors puts the business on a strong foot over the long term.

Management

While it seems a long time ago now, there was a point where there where the ING felt the wrath of investors over the pay packet attributed to then CEO Jim Leighton. Ultimately Jim resigned and went back to the US and the remuneration package for the CEO was changed.

This ultimately lead to the early resignation of Peter Bush, Chairman since IPO who handed the reigns to Helen Nash who was left to steer the company through some tough times along with Andrew Reeves who was appointed to the role a few months earlier. Together, along with the executive and remaining Board members saw price touch all time lows in September 2022, but price has rebounded since.

Coincidentally, the stock was listed in 2016 by private equity. Initially the float was priced at between $3.57 and $4.14 or 13.5x to 16x profit. At the time fund managers were wary and ultimately settled on $3.15 or 12x profit. For the record, private equity bought the company from Bob Ingham for $880 Million and floated it for $1.2B.

Pleasingly, Directors have consistently purchased stock, and though their relative interests are quite small, it does provide some confidence in the long term story.

While there is no rock stars amongst the list of leaders, given the improved performance overall it would appear to be a pass mark for the business.

Risks

One could argue that many of the risks that could affect a soft commodities business like ING have already occurred in the past few years. While investors will hope that they are well and truly behind the company, unfortunately the nature of the risks may appear again at some point in the future and investors need to be aware of them.

Beyond labour shortages, natural disasters and rising costs which the company has had to navigate over the past three years. Other risks investors need to consider are:

• The Australian or New Zealand gov't change restriction laws on overseas poultry

• Consumers changing tastes

• Disease outbreak eg Bird Flu

• Concerns over animal welfare and treatment

Such is the nature of agricultural business, how the company manages such risks should they eventuate will govern its long term success.

Conclusion

The long term attractiveness of an ING is obvious. The problem is that such is the nature of a soft commodity stock, that is often influenced by factors beyond its control.

However the operational turnaround appears locked in, the troubles of the recent past seem behind it and with an outlook tied to a rising population, healthy eating and sustainable living, it is unsurprising the market’s view on the business has changed so aggressively. Therefore the business may be worth a look now.

It has come onto my radar on account of the much improved business performance. Now I just have to wait for the right entry. Don’t want to count my chickens before they hatch!

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