-Earnings guidance is ahead of consensus
-Average chicken pricing increased 12% in 2H21
-Management identified 250-plus improvement opportunities
-More higher margin products planned
The covid pandemic arguably brought mixed blessings for poultry processor
Following an improvement in trading conditions, as the impact of covid restrictions ease and operating efficiencies increase group margins, this week's maiden FY21 earnings guidance was ahead of consensus expectations. As a result, brokers believe
While uncertainty around the current Victoria lockdown is not reflected in management's update, guidance suggests underlying earnings are expected to be
While
Operational efficiencies
Macquarie believes
In early May Inghams noted that third quarter 2021 core poultry volumes were slightly lower versus the previous period due to cycling a period that benefitted from covid pantry filling. Management also noted slightly lower third quarter volumes had been offset by operational efficiencies and net feed cost improvement, which are positive for earnings margins.
Based on
Due to increasing evidence of delivery on planned margin expansion, Credit Suisse believes demand trends remain positive, with input feed costs likely to provide a relative tailwind in FY22.
In Macquarie's view, higher-margin channels are improving as covid restrictions ease. The broker notes average chicken pricing across the products track increased 12% in the second half of 2021 to date versus the previous period and up 5% sequentially versus first half 2021. Overall, Macquarie is forecasting FY21 net profit 5% up on the broker's prior forecast.
Morgans also expects fourth quarter 2021 to have benefited from lower grain costs. The broker notes, the company has previously stated that FY22 will benefit from both a full year of lower grain prices and further efficiency benefits from recent growth initiatives, including new Victoria and WA hatcheries.
Over time, the company is expected to expand its product offering to include higher margin products. With beef prices remaining at record highs, Morgans expect solid volume growth given that chicken is the affordable protein.
Resumption of normal trading & tax credits
While the impacts from international tourism restrictions in A&NZ were still being felt when
Two standouts were chicken nuggets and value enhanced products up 29% and 18% respectively on average in the second half of 2021 to date yer on year. While local lockdowns have had minimal impact on the retail channel, which accounts for 53% of revenue, Macquarie notes that consumer shopping behaviour continues to normalise.
Future earnings will also be aided by the expected receipt of an R&D tax credit and while this will lower
Macquarie assumes it will be more material in FY21 given the need for management to disclose it in the company's update. Macquarie reduces effective tax rate assumptions to 27.6% in FY21 from prior 29.1%.
While the R&D tax credit has typically been
Credit Suisse, Morgans, Macquarie and Cit -- four of the six brokers on the FNArena to cover the company -- all have Buy (or equivalent) recommendations on
Post forecast changes, Morgans blended valuation has risen to
By comparison, Credit Suisse and Macquarie have a target price of
Credit Suisse remains of the view that
The consensus target on
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