Inghams is one of the leading suppliers of chicken in Australia (Credit: Inghams)

Inghams shares sold off sharply today, in-spite of being able to increase full year profits and sitting on a relatively unassuming PE multiple of 11.3. Inghams increased profits by a healthy 10.1% to $126m, and revenue rose by a more modest amount to $2.5bn. What investors didn’t like however, is the increase in expenses. Making matters worse, efforts to improve efficiency in the company’s vast, trans-national processing network struggled to deliver results in the face of high consumer demand. They also announced a dividend cut from 11.6c/ share a year ago to 10.5c/ share now. Given the IPO was heavily marketed to retail investors through Commsec, this is unlikely to go down well with shareholders.

The most troublesome aspect of the results however was forward guidance management had for the market. While management believes that poultry demand will continue to grow, the market already forecasted this increase and it was largely in the price before today. The main cause for concern is the ongoing drought, which means processing costs are projected to continue rising and the unexpected cost increase we saw in this year’s results will continue. This highlights the risks of investing in agricultural stocks at high multiples; while it could be a profitable strategy, investors must be prepared for the prospect of a large multiple contraction if the weather and climate, two factors out of our direct control, make a turn for the worse.

Inghams focusses on chicken and turkey and is one of the largest companies operating in the Australian chicken market. The company expanded through a mix of organic and inorganic expansion and has been a generally well-managed growth story. It only recently listed on the ASX and has traded since 2016. This is one of the reasons why the company sold off so heavily – the market has limited experience trading shares in the business and could still be in a process of price discovery as investors monitor the cycle and come up with multiples that are appropriate for the business.

 

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August 29, 2019