Automation And Poultry Demand Will Support Modest Efficiency Gains Amid Industry Headwinds

Catalysts

About Inghams Group

Inghams Group is a leading poultry producer in Australia and New Zealand, supplying chicken and turkey products across retail, QSR, wholesale, and export channels.

What are the underlying business or industry changes driving this perspective?

• Although automation projects at Murarrie, Osborne Park and Te Aroha are expected to deliver labor and yield efficiencies, execution risk, extended commissioning timelines and potential disruption across FY '26 and FY '27 could delay expected productivity gains and constrain margin expansion.
• Despite currently benign global grain and soybean supply supporting lower feed costs, any normalization or reversal in commodity prices beyond FY '26, combined with limited ability to reprice quickly in contracted retail and QSR channels, could compress gross margins and weaken earnings resilience.
• While poultry continues to benefit from a structural cost advantage over red meat and growing QSR menu penetration, intensifying competition and incremental industry capacity in Australia may prolong wholesale price pressure and limit net selling price growth, capping revenue growth and EBITDA per kilo.
• Although New Zealand is delivering strong growth, favorable pricing and successful integration of Bostock Brothers, the group’s increasing reliance on this region to offset softer Australian performance leaves earnings exposed to any future demand slowdown or regulatory or biosecurity disruption in that market.
• While diversification away from Woolworths and into broader retail and QSR channels reduces customer concentration risk, the more complex multi customer footprint can increase logistics and production inefficiencies, raising operating costs and dampening any recovery in net margins over the medium term.

Assumptions

This narrative explores a more pessimistic perspective on Inghams Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Inghams Group's revenue will grow by 1.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 2.8% today to 2.9% in 3 years time.
• The bearish analysts expect earnings to reach A$95.4 million (and earnings per share of A$0.28) by about December 2028, up from A$89.8 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as A$140.9 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 11.1x on those 2028 earnings, up from 10.0x today. This future PE is lower than the current PE for the AU Food industry at 15.2x.
• The bearish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.37%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The multiyear automation and network investment blueprint at Murarrie, Osborne Park and Te Aroha is designed to lift capacity, improve yields and reduce labor intensity. If these projects are delivered on time and achieve the attractive returns management is targeting, structural efficiency gains could drive higher margins and earnings growth than expected, supporting a higher share price through improved net margins and return on invested capital.
• New Zealand is already delivering exceptional growth with strong brand performance, favorable category conditions and successful integration of Bostock Brothers. If this region continues to compound volumes and pricing while automation projects further enhance efficiency, the group mix could tilt toward a higher margin portfolio and deliver faster growth in group EBITDA and earnings.
• Long term, poultry retains a clear cost advantage versus red meat and is benefiting from strong structural demand in QSR and retail. If consumer trade down from beef and lamb accelerates and QSR rollout plans for poultry based menus continue, Inghams could see stronger than anticipated volume recovery and pricing power, boosting revenue and operating leverage.
• Capital structure remains conservative with leverage at 1.8 times and an expanded, longer dated debt facility that supports ongoing investment. If management continues to reinvest in high return projects while maintaining strong cash conversion near current levels, compounding free cash flow and dividend capacity could lead investors to rerate the stock upwards.
• Cost discipline has already contained non feed cost growth to 0.3% and management is targeting annualized savings of between $60 million and $80 million below the inflation driven cost base. If these initiatives are executed effectively alongside still supportive global grain dynamics, sustained cost out could widen margins and push earnings materially above current expectations.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Inghams Group is A$2.3, which represents up to two standard deviations below the consensus price target of A$2.79. This valuation is based on what can be assumed as the expectations of Inghams Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$3.5, and the most bearish reporting a price target of just A$2.3.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be A$3.3 billion, earnings will come to A$95.4 million, and it would be trading on a PE ratio of 11.1x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of A$2.42, the analyst price target of A$2.3 is 5.2% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.