ANALYST’S NOTE

Overall, in our view, Inghams Group (ING) reported a solid FY18 result, with much of the ongoing investment debate focused on the quantum of cost increases in FY19.

This largely overshadowed the capital management initiatives the Company announced, with the board approving capital return of $125m to shareholders (or 33cps – expected timing Dec18 or Jan19). Further, with the sale of Mitavite expected to complete in the fourth quarter of 2018, the Board intends to initiate an on-market share buyback of up to 5% of issued capital.

With respect to the results, underlying EBITDA (excluding asset sale and restructuring charges) of $208.9m was below market estimates of $213.0m and up +7.1% on pcp.

We maintain our Neutral recommendations as we see a number of challenges for the Company in the near-term: 1. Costs out remain on track but are now coming to a completion; 2. energy and feed cost pressures are expected to continue in FY19; 3. higher tax rate; 4. New Zealand remains a challenge (excess capacity remains); and 5. No update on the CEO leads to further uncertainty.

So why Neutral? The Company retains a strong balance sheet with capital management on the agenda in the near-term (potential of an on-market buy-back likely to provide some share price support) and trading on reasonable valuation of 13.3x FY19 PE-multiple and yield of ~5%.

• Earnings. Underlying EBITDA was up +7.1% to $208.9m, which excludes the benefits from asset sale and restructuring. Underlying NPAT was up +12.4% on pcp, however this was assisted by a lower effective tax rate and lower net financing costs (due to higher cash balances). Headline EBITDA of $212m saw a net benefit with asset sales ($19.4m) more than offsetting restructuring costs ($16.3m).
• Cash flow. Cash flow was solid, with operating cash conversion excluding inventory financing was 112.1%. Headline operating cash conversion of 122.9% benefited from inventory financing benefit of $23m.
• Gearing. Net debt declined to $145m, with gearing reducing to 0.7x (ND/EBITDA), driven by improved cash flow and proceeds from asset sale.
• Capital management. Given the strong gearing position and current cash on the balance sheet, management has announced capital return of $125m (equivalent to 33cps). Further, with the impending sale of Mitavite in fourth quarter CY18, the Board also intends on proceeding with an on-market buyback of up to 5% of issued capital.
• Outlook. Management provided the following outlook comments: 1. Expect demand for poultry products to grow, as inflationary pressures (i.e. higher prices) are being felt across all protein categories. Hence expect poultry to retain its “relative” attractiveness. 2. Cost pressures in the form of higher energy prices and feed costs, are expected to continue. Management will try to offset these via pass-through to the customers when necessary. 3. NZ is expected to remain challenging in FY19. 4. Expect a higher effective tax rate in FY19 (29% vs. 24.4% in FY18) due to changes in NZ tax legislation%.