Inghams Group (ASX:ING) has been listed for over a year now. It is trading off its recent highs so we examine whether this now represents an opportunity to grab a slice of Inghams Group shares.
Inghams Group is a vertically integrated poultry producer with its own quarantine facilities and feedstock supplies. In FY17, poultry accounted for 88% of sales with the feedstock accounting for the rest. Inghams Group operates its poultry business in Australia and New Zealand. It has a strong retail market share of 40% and 34%, respectively, with operations in Australia accounting for 85% and 81% of revenue and EBITDA, respectively. Within feedstock, the majority of the total output is consumed internally. Inghams Group’s key customers for poultry include retailers and Quick Service Restaurants (QSR).
Inghams Group Fundamentals
As Inghams Group’s revenue is influenced by currently low feedstock prices, volume growth and improvement in gross profit margin are considered the key measures. To this end, earnings growth in FY17 was driven by strong increases in Australian poultry volumes (+11.5%). This was underpinned primarily by retail and QSR demand, as well as benefits from its cost savings program.
Inghams Group expect continued growth in poultry volumes, with Australian volume growth expected to align more closely with historical trends of 3-4%. The rate of volume growth in FY18 is lower than FY17, as Inghams Group cycle a number of customer Everyday Low Prices (EDLP) initiatives (i.e. $8 roast chicken). Importantly, the return to more normal volume growth should translate to more profitable volumes as the supply chain can adjust. Group earnings are also supported by continued benefits from a cost savings program and ability to pass on higher feed costs.
The Company generates strong free cashflow (the cash conversion rate is above 100%) after taking into account CAPEX undertaken to expand to capacity. Net debt is expected to continue declining as a result of further asset sales in FY18 and the gearing level, which is below the Company target, is manageable in light of the strong free cashflow capability.
The Private Equity Situation
The Company listed on the ASX in November 2016 and its major shareholder is private equity group TPG, with a 47% stake. In this light, one potential risk for the stock is the possibility of a sell down of shares from TPG. This is because the full amount of its shareholding was released from escrow at the FY17 results. In context, however, TPG has been quoted in the media as a ‘long-term supporter’ of Inghams Group.
Overall, Inghams Group is a stock to consider, given that it is trading on a 1-year forward P/E multiple of around 11.5x, which we consider attractive in light of a steady EPS growth profile of ~9% for FY18 and ~6.5% for FY19.
Inghams Group Chart
There are a couple of factors which now suggest that Inghams Group can head higher form here. The peak for Inghams Group came in October 2017. Then the shares fell back, retracing back nearly 61.8% of the prior uptrend. This Fibonacci level seems to be lending support for the stock. Since it found that support level in early January, the shares have jumped higher, breaking the downtrend that started after the October peak. It now therefore appears as though Inghams Group will trade higher. As long as it can hold these levels, this now means we could be seeing a buying opportunity in Inghams Group.
Current share prices available here.
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Michael Gable is managing director of Fairmont Equities.
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