Morgans bullish on Inghams chook business

Vertically integrated poultry production and distribution business, Inghams Group (ASX: ING) delivered an impressive result for the first half of fiscal 2017 with the pro forma net profit of $51.3 million representing growth of 13.8%.

This compared favourably with Morgans CIMB’s expectations of $47.4 million, and the broker has reaffirmed its buy recommendation and 12 month price target of $4.00, implying a premium of approximately 20% to Thursday’s closing price of $3.30.

There was a mixed reaction to the result as the company’s shares initially increased from the previous day’s close of $3.39 to hit a high of $3.46 before closing at $3.33.

Inghams listed on the ASX in November and given that the first half performance was in line with prospectus forecasts and management reconfirmed that it was on track to achieve full-year pro-forma net profit guidance of $98.8 million a more upbeat share price response wouldn’t have surprised.

It should be noted that broker projections and price targets are only estimates and may not be met. Also, historical data in terms of earnings performance and/or share trading patterns should not be used as the basis for an investment as they may or may not be replicated. Those considering this stock should seek independent financial advice.\

One detracting factor may have been management’s comments regarding challenging market conditions in New Zealand which are expected to continue in the second half.

Morgans CIMB has lowered its earnings expectations in relation to the New Zealand business, but it is of the view that the Australian operations will offset lower than expected earnings from that region, resulting in the broker reaffirming its full-year earnings forecasts. Furthermore, Morgans believes that management’s fiscal 2017 forecasts is conservative.

Group analyst, Belinda Moore believes strongly in Inghams and the poultry industry saying, “For a market leader with an integrated network, leverage to attractive industry fundamentals and significant upside from transforming a previously family run business, we believe that ING is undervalued on a fiscal 2017 forecasts PE multiple of 12.8.

Inghams Chief Executive, Mick McMahon said, “The results for the group are in line with prospectus forecasts and reflect strong demand for Ingham’s quality products with our customers continuing to investing chicken as the healthy and competitive protein”.

Inflated beef and seafood prices drive increased demand for chicken

There is no doubting the fact that chicken has become more competitive from a pricing perspective. Both beef and seafood prices are at all-time highs, while there has been little price movement in chicken.

A reasonable comparison is the price difference between skinless chicken breast and rib/eye fillets steak as both have very little wastage and are high in protein. Chicken breasts sell for circa $10 per kilo while the price of fillet steak generally fluctuates between $35 and $55 a kilo, with better quality cuts more often than not at the top end of that range.

As a source of Omega 3, Tasmanian salmon was promoted heavily as a health food, but challenging growing conditions have resulted in its price rising from well below $30 per kilo to $35 per kilo and higher.

This appears to have pushed up the price of other table fish such as snapper and barramundi with the former now fetching top of the range eye fillet type prices.

Consequently, one can only see demand for chicken increasing, and with Inghams being Australia and New Zealand’s leading integrated poultry producer, supplying the retail, restaurant and consumer markets, it is well-positioned to take advantage of this trend.