Inghams: Omicron presents unprecedented challenges

About the author:

Belinda Moore
Author name:
By Belinda Moore
Job title:
Senior Analyst
Date posted:
14 January 2022, 10:30 AM
Sectors Covered:
Agriculture, Food & Beverage, Travel and Chemicals

  • Following a weak 1Q22 given lockdowns, Inghams (ASX:ING) has announced that since mid to late December, material staff shortages due to the Omicron variant have disrupted its operations and sales. Feed prices also remain elevated.
  • ING hasn’t quantified the financial impact but it is expected to be material, particularly to the 2H22. We have downgraded our forecasts.
  • With heightened near-term earnings uncertainty, we maintain a Hold rating with a new target price of (login to view).

Event: weak trading update due to Omicron impacting chicken supply

Severe staff shortages due to the Omicron variant have disrupted sales, product mix (to lower value products), increased its cost base and hurt margins.

Analysis: staff shortages have disrupted sales and feed costs remain elevated

The spread of Omicron and resulting staff shortages are having a significant impact on ING’s (and some of its suppliers and customers) operations and disrupting its production and distribution capability and consequently sales.

While all of ING’s major operational sites are operating and have not experienced significant on-site COVID transmission, the significantly lower level of staff availability is impacting its production volumes and operational efficiency (hurts margins). Feedback suggests that processors are operating with up to 50% less staff.

Coles and Woolworths have placed limits on chicken purchases and QSR customers such as KFC have said that some chicken products will be unavailable given supply chain and workforce problems. In response, ING is making changes to its volume and mix. Consumers are being encouraged to buy whole chickens as supply of some higher margin cuts have become scarce (e.g. the most labour intensive cuts to produce, such as cut-up, de-boned and skinless).

Excess volumes through Wholesale have also impacted pricing in this channel.

ING is unsure as to how long the current challenges will persist and as a result, has not quantified the financial impacts on the business.A further update will be provided with the company’s 1H22 result on 18 February.

ING’s noted that recent State and Federal Government changes to isolation rules for close contacts in the food sector should help mitigate some of the pressure. It expects production capacity will recover quickly as operating conditions stabilise. 

ING is closely managing its working capital position and will look to implement initiatives in the 2H22 to minimise any impacts. We expect that ING’s inventory levels will rise. ING ended FY21 with a strong balance sheet with ND/EBITDA of 1.2x and at the lower end of the Board’s target range of 1.0-2.0x. 

Feed costs remain elevated due to production downgrades in the northern hemisphere due to drought and strong international demand. This will likely impact 2H22 and FY23 margins. ING has pass throughs with some customers but overall, rising grain prices are a negative given it is the company’s key input cost.

The question is to what extent can ING’s efficiency projects offset this headwind. 

ING’s update follows a weak 1Q22 given lockdowns across ANZ impacted trading and particularly its sales mix which went to lower margin channels. However, ING should have had a much stronger 2Q22 following the easing of restrictions.The 2Q is also ING’s bigger quarter with Christmas. Despite modest volume growth of ~1.5%, given margin pressures, we forecast 1H22 EBITDA to fall 5%. 

We downgrade our forecast for COVID impacts and feed prices

We have revised our forecasts but note that material earnings uncertainty remains.

We have used the 2H20 EBITDA as a guide to our 2H22 forecast given it incurred a very weak 4Q20 impacted by COVID channel/mix impacts which resulted in industry oversupply, price discounting and ING recognised a A$9.3m inventory provision. 

Higher feed costs also weighed on margins. We have reduced our FY22 EBITDA by 16.5% and NPAT by 24.9%. 

Our new forecast reflects a tough 1Q22 and a particularly challenging 3Q22 followed by a recovery in the 4Q22.

Investment view - Hold rating 

While we are willing to look through COVID impacts, high grain prices remain another earnings headwind for ING into FY23. Post forecast changes, our blended valuation has (login to view).

Given the uncertainty we retain a Hold.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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