Inghams Group: Chicken Is Cheap and So Are Shares

We think the market’s concerns about Inghams ING are overdone. Granted, input costs—principally labour and feed—are elevated at Inghams, and commensurate price increases are notoriously difficult to achieve. Poultry is highly commoditised, and Inghams is effectively a price-taker, leading to our no-moat rating. Margin pressure has been exacerbated by unfavourable product mix as consumption shifted from restaurants to supermarkets since the pandemic. But we expect headwinds to prove transitory and forecast profitability improving further from fiscal 2024 as more price increases are won and mix shift continues to normalise. At current prices, shares in Inghams screen as attractive compared with our unchanged AUD 3.50 fair value estimate.

Consumers are under a lot of pressure. Discretionary sales growth in Australia is slowing amid recession-like consumer sentiment, rampant food price inflation, and a continued squeeze on renters and mortgage-payers. Shoppers are also trading down within and across categories when grocery shopping. Shoppers are substituting more expensive products with cheaper alternatives, underpinning cyclically stronger demand for Inghams’ poultry products. Chicken meat is cheaper than competing proteins, driven by favourable production dynamics. Producers can convert feed into live weight for chicken at a rate that is about 1.5 times more efficient than pork and 4 times more efficient than beef.

Inghams’ largest input cost is feed, which has been expensive amid a weak Northern Hemisphere cropping season that led to elevated export demand for Australian wheat and supply shortages of soymeal. While grain prices remain above pre-COVID-19 levels, they have moderated significantly in the last year. The S&P GSCI Wheat and Soybeans Indexes are down in June 2023 from June 2022 by about 45% and 17%, respectively. While cropping conditions can fluctuate from year to year, we expect crops to reflect normal conditions over the long run.