Refinancing Will Provide $200 Million For Future Automation Investments

Key Takeaways

• Successful acquisition and integration of Bostock Brothers in New Zealand drives volume growth and revenue improvements, enhancing future financial prospects.
  
• Refinancing of syndicated financing agreement provides financial flexibility for operational investments, boosting potential earnings and margins through cost efficiencies.
  
• Inghams Group faces challenges such as pressured margins from acquisitions, declining poultry volume in Australia, and adverse external factors impacting revenue and earnings.

Catalysts

Produces and sells chicken and turkey products under the Ingham’s brand in Australia and New Zealand.

• The acquisition and integration of Bostock Brothers in New Zealand is on track and performing well, contributing positively to volume growth and net selling price (NSP) improvements, particularly in the New Zealand retail sector. This acquisition is expected to bolster future revenue growth.
  
• The refinancing of the company's syndicated financing agreement increases the total size of facilities by $200 million and extends maturity by 2.4 years, providing financial flexibility for further operational and automation investments, potentially enhancing earnings and margins through cost efficiencies.
  
• Ongoing strategic cost management initiatives, especially in feed cost reduction and variable performance-based contracts with growers, are likely to continue offsetting inflationary pressures and improve net margins.
  
• The anticipated stabilization and eventual growth in the QSR channel, bolstered by marketing investments and improving consumer sentiment in Australia and New Zealand, is expected to drive volume and revenue growth.
  
• Global soybean production forecasts indicate a potential increase in supply, leading to subdued pricing in feed costs, representing a cost benefit that could positively impact net margins and overall profitability.

Inghams Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Inghams Group's revenue will grow by 1.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.8% today to 3.7% in 3 years time.
• Analysts expect earnings to reach A$124.8 million (and earnings per share of A$0.33) by about July 2028, up from A$89.6 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as A$106.5 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.9x on those 2028 earnings, down from 14.6x today. This future PE is lower than the current PE for the AU Food industry at 24.5x.
• 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 6.73%, as per the Simply Wall St company report.

Inghams Group Future Earnings Per Share Growth

Risks

• Retail volume growth in New Zealand is largely driven by the acquisition of Bostock, with underlying New Zealand NSP (Net Selling Price) excluding Bostock down by 1.7%. This indicates potential pressure on margins if acquisitions do not compensate for sluggish underlying performance. [Net Margins]
  
• The decline in core poultry volume by 2.7% in Australia, partly due to a temporary reduction in processed bird numbers, could signal challenges in maintaining revenue levels, especially if consumer conditions remain subdued. [Revenue]
  
• Wholesale volumes and pricing have been adversely affected by external factors such as Avian influenza outbreaks and increased market supply, which might continue to depress prices and impact earnings negatively. [Earnings]
  
• Despite a small rise in average selling price, New Zealand revenues have been impacted by a decrease in external feed revenue and a reduction in feed NSP, indicating vulnerability to input price fluctuations and potential volatility in profit margins. [Net Margins]
  
• The company faces continuing cost-of-living pressures affecting consumer discretionary spending, which could suppress demand in the near term, complicating efforts to achieve projected volume and revenue growth. [Revenue]

Valuation

• The analysts have a consensus price target of A$3.578 for Inghams Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$3.9, and the most bearish reporting a price target of just A$3.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$3.4 billion, earnings will come to A$124.8 million, and it would be trading on a PE ratio of 12.9x, assuming you use a discount rate of 6.7%.
• Given the current share price of A$3.51, the analyst price target of A$3.58 is 1.9% higher. 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.