The Inghams Group Ltd (ASX: ING) share price attracted a lot of attention when the company first floated. Many media commentators thought that the company was overpriced, or at least that investors were setting themselves up for a fall. Here's my take on how the company's first few months of listed life went:
- Revenues rose 4.3% to $1,227 million
- Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) grew 9.1% to $95 million
- Net Profit After Tax (NPAT) rose 14% to $51 million
- Statutory NPAT fell 54% to $9 million
- Dividend of 2.6 cents per share declared
- Poultry volume rose 13% to 248 kilotonnes
- Outlook for full-year NPAT of $98.8 million and for capital expenditure to drop off after the first half peak
- Total dividends paid expected to equal 65% to 70% of full-year NPAT, fully franked
Note: All figures are Pro Forma unless otherwise specified
So What?
If you ever wondered how much poultry 28 million people can eat, the answer is 'an incomprehensibly large amount'. Inghams is just one of 3-4 major suppliers in the ANZ region and it sold 248,000 tonnes of poultry in the past 6 months, up 13% on the past year.
High levels of capital expenditure are expected to result in increasing efficiency of production and lower costs compared to today, with automated de-boning machines one of the highlights of today's presentation. This is part of Inghams' 'Project Accelerate', which involves further streamlining and automating the business in order to cut costs and improve volumes alongside margins. The closure of the Cardiff processing facility and purchase of new machinery during the half suggests investors should expect the benefits to flow sooner, rather than later.
Some of the benefits have been realised already, with a widening of gross profit margins from 17.8% previously to 18.7% in the current half. EBITDA margins grew from 7.4% to 7.8%. On the downside, oversupply in New Zealand led to weaker business performance in that market, as competition between TEGEL GRP FPO NZX (ASX: TGH) and Inghams heats up.
Now What?
With the improvements in automation and other efficiencies, some of my scepticism about Inghams' ability to cut costs is reducing. However, as I noted in my initial coverage of the Inghams IPO, (Initial Public Offer) cost pressures from competitors and customers remain strong, and the company's ability to pass on the benefits of lower costs to shareholders is an open question. I remain quite sceptical of this business.
Suspending my disbelief for a second, whatever happens I think the potential opportunity for Inghams shares is limited to the next couple of years. Once capital expenditure slows down and when/ if cost savings are able to successfully be passed onto investors in the form of higher profits or dividends, there is the potential for upside. That said, I would not like to own this manufacturing business in a competitive industry with single-digit demand growth per annum for the long term.
While today's announcements were informative, I think the most important report will actually come next February, when investors can see the results of a full year of cost cutting and competition. I'm staying on the sidelines for the time being.
