Inghams Group: Cracks Appear In Poultry Duopoly

This story features INGHAMS GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: ING

Australian’s once cozy duopoly for poultry products is breaking down, adding one extra challenge for market leader Inghams Group.

-Inghams Group’s FY24 result and guidance miss forecasts
-Earnings shift to Retail from out-of-home channels
-UBS highlights a major change in industry dynamics

By Mark Woodruff

The key swing factors for Inghams Group ((ING)) include adjustments to supply contracts with major customers and fluctuations in input costs, particularly feed costs, which are largely beyond management’s control.

Positively, FY24 results revealed feed costs for the group are falling and projected to fall further, but management also announced Woolworths Group ((WOW)) has elected to progressively diversify its supplier base away from Inghams, impacting negatively upon FY25 poultry volume guidance.

While FY24 volumes were stronger-than-expected, Ingham’s FY24 result missed consensus forecasts, due to lower prices in the wholesale channel in the second half, suspects Morgans.

Earnings increased by 31% on FY23 to a record $240.1m yet fell -8% short of the consensus forecast as second half earnings fell due to normal seasonality, inflationary headwinds and a shift towards in-home dining (Retail) from the out-of-home channels –Food Service and quick service restaurants (QSR)– due to cost-of-living pressures.

This shift to Retail required management to rebalance production and inventories during the second half, which slowed volumes and increased the cost base.

FY25 earnings guidance of between $236-250m missed the consensus estimate by -5%, but management is guiding to a trough in volumes over FY25 and anticipates an improvement in QSR volumes over FY25 partly offset by the Woolworth’s-impacted decline for the in-home channel.

The new Woolworths contract will see a phased reduction in annual volumes, partially offset by already secured significant new business from other retail customers.

This change represents a major change in industry dynamics from one that has historically been seen as a favourable duopoly for Inghams Group and Baiada Poultry in Australia with a combined market share of between 70-75%, highlights UBS.

Inghams supplies chicken, turkey and plant-based protein products into retail, quick service restaurants (QSR), foodservice distributors, wholesale and export channels. The company is also one of the largest producers of stockfeed in Australia.

Regarding the channel mix, Ingham’s largest distribution channel (Supermarket Retail) remains strong with Core Poultry volume rising in FY24 by 9% for both Australia and New Zealand, more than offsetting the weakening QSR channel where Core Poultry volume in Australia fell in Australia and New Zealand by -7% and – 3%, respectively.

Over FY24, group poultry volumes rose by 3% on the previous corresponding period due to a shift in channel mix to retail, and a reduction in QSR and out-of-home channels, explains Goldman Sachs.

Macquarie adds earnings fell by -27% in the second half of FY24 on lower wholesale and export volumes as significant deleverage occurred due the large, fixed-cost nature of the business.

Cost-of-living pressures in both Australia and New Zealand, where Inghams is the dominant poultry producer, drove a shift to in-home dining from out-of-home dining, which favoured the Retail channel, while the Food Service channel volume was flat.

New Zealand continues to perform well despite a tough macroeconomic backdrop, with an EBITDA margin of 9.3%, supported by 7% normalised growth in volume.

FY25 volume guidance is for a -1-3% decline year-on-year largely due to the Woolworth’s contract transition, but management expects volume will partly recover as new recent agreements take effect.

So, the near-term looks challenging due to volume declines and demand pressures, explains Macquarie, but medium-term structural growth remains, and the analyst considers shares are trading at an attractive valuation (following yet another sell-down).

A final fully franked dividend of 8 cents was declared.

Feed costs

Feed costs represent the largest component of Inghams’ cost-of-goods-sold (COGS) metric, with prices and availability of raw ingredients hard to manage.

As of June 30, observed feed costs fell by -4% year-on-year for wheat and -16% for soyabean meal, according to management.

Since then, there have been further double-digit year-on-year declines in feed cost indicators, which Bell Potter considers a potential tailwind from the second half of FY25 to the first half of FY26.

The Woolworths agreement

Management has entered into a new multi-year supply agreement with Woolworths allowing for reduced volumes in fresh poultry over FY25 to an agreed offtake level that will form a new contract base that can be expanded in the future.

Inghams has historically been over-indexed to Woolworths versus other key customers, points out Macquarie, and management has noted a more balanced indexation with remaining customers.

The volume loss wasn’t quantified, but management’s FY25 poultry volume guidance of -1% to -3% provides some (limited) insight into the quantum of the loss.

Macquarie sees potential risks for other customers implementing similar changes, noting KFC store owner Collins Foods ((CKF)) has also looked to diversify its supplier base with the addition of a new supplier earlier this year.

The outlook

In downgrading to Hold from Buy, Bell Potter cites volume impacts from customer contract changes and changing consumer consumption patterns, which are impacting upon chicken products demand for QSRs/Food Service.

Similarly, Evans and Partners does not expect the valuation gap to close quickly in the absence of positive earnings catalysts and concerns around the Woolworths contract, and downgrades to a Neutral investment view from Positive.

UBS also highlights potential for elevated price competition in Poultry markets as Inghams attempts to replace lost volume from Woolworths.

On the other hand, Jarden believes management has done a great job mitigating the potential earnings impact from the change in volume requirements for the Woolworths contract, which is seen as not reflected in the current share price.

This broker suggests the current valuation for Inghams is attractive, with shares trading below their historical price earnings multiple and at a discount to global peers.

Following FY24 results, the average target of four covering brokers in the FNArena database has fallen by -18.4% to $3.45, suggesting 11%-plus upside, ex dividends.

Of the four brokers two have a Buy (or equivalent) rating and two are on Hold.

Outside of daily monitoring, Goldman Sachs rates the stock a Sell, Jarden Overweight and Evans and Partners has moved to a Neutral rating from Positive. The average target of the three is $3.47.

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