Inghams: Omicron knocks ING for six

About the author:

Author name:

By Belinda Moore

Job title:

Senior Analyst

Date posted:

21 February 2022, 3:15 PM

Sectors Covered:

Agriculture, Food & Beverage, Travel and Chemicals

• Inghams (ASX:ING) reported a solid 1H22 result considering the disruption from COVID lockdowns which impacted some of its higher margin channels. It materially beat our forecasts.
• The quantified impacts of Omicron on the 2H22 were materially worse than expected and are likely to continue over the next few weeks, albeit at a lesser extent. We have downgraded our forecasts again.
• With heightened near-term earnings uncertainty due to COVID and elevated feed prices, we maintain a Hold rating.

Solid 1H22 result despite COVID challenges

Total Poultry volumes increased 3.4%, sales rose 1.8%, EBITDA (pre AASB 16) fell 1.0% and NPAT was up 3.4%. The result materially beat our forecasts.

Balance sheet remains solid, effectively managed lockdowns

The solid 1H22 was underpinned by ING’s effective management of extended lockdowns and changing market conditions, which allowed it to operate largely undisrupted and maintain continuity of its supply.

ING reported strong volume growth, however this was offset by an adverse revenue mix (weighted to Wholesale and Export) and a lower average selling price (-2.7%), impacting margins.

Operating cashflow (pre AASB16) fell to A$37.0m vs A$49.1 the pcp and was in line with MorgansF. The balance sheet was solid, with ND/EBITDA of 1.3x (1.7x 1H21 and 1.2x Jun-21). However with materially lower EBITDA in the 2H22, gearing will rise at year end. The Board declared an interim dividend of 6.5cps.

Omicron will materially impact the 3Q22

As expected, ING did not provide formal FY22 guidance. The 1H is seasonally stronger than the 2H as ING experiences strong demand for poultry over the summer period and turkey demand is skewed to the Christmas period or 2Q.

ING did say that its underlying EBITDA and NPAT for the first 7 weeks of 2H22 were down approx. A$35m and A$24m on the pcp. Given the quantum of this impact, the company was loss making over this period.

The Omicron variant has resulted in severe staff shortages at ING’s facilities (down ~50% at the peak). While volumes are holding up given ING has the chickens, staff shortages have materially impacted its revenue mix as the company couldn’t produce its higher margin value added cuts.

As a result, excess volumes from both ING and the greater industry have been going through the Wholesale channel which has placed it in oversupply, resulting in falling prices. ING’s cost base has also risen materially from higher labour, supply chain and transport costs.

While ING’s east coast of Australia operations now appear through the worst of it, challenges remain and management said it would take time to get back to normal operating conditions. Its workforce still isn’t fully back, the company is operating in a tight labour market which is making it difficult to hire staff and there is wage inflation.

There are also early signs that the Omicron variant is now being seen at its New Zealand operations and will likely impact its operations in WA when this state reopens. Additionally, it will take time for the Wholesale channel to rebalance.

Feed costs remain elevated following production downgrades in the northern hemisphere due to drought and strong international demand. ING expects to incur higher feed costs in 2H22 vs the pcp (more so in the 4Q22), with a full year impact in FY23.

ING is aiming to partly offset this cost headwind by increasing its selling prices and realising benefits from its efficiency program. ING has pass throughs with some customers but overall, rising grain prices are a negative given it is the company’s major input cost.

We downgrade our forecasts

We have made material downgrades to our FY22 forecasts (EBITDA -15.6% and NPAT -22.1%) as the quantified impacts of Omicron were a lot worse than expected and they are likely to continue over the next few weeks, albeit at a lesser extent.

There is no change to our FY23/24 EBITDA forecasts but we upgrade our FY23/24 NPAT forecasts slightly due to lower D&A given ING’s reduced capex spend in FY22 given COVID delays.

Investment view

Post forecast changes, our blended valuation has fallen slightly to (login to view).

Given the near-term uncertainty we retain a Hold.

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