What the analysts think about top gainer Ingham’s Group

Ingham’s Group (ASX: ING) was leading the ASX top gainers list at lunchtime on Monday, up an eye-catching 10.58% to $3.03 as at 12:45 pm (AEST) Monday 20 February. 

The rally extends into Week 8 of 2023 after the company posted its first-half results last week.

In this article, we will explore what three different analyst teams make of ING’s performance through 1H23. 

Quick bite: ING’s first-half results

• ING noted that while half-year results were below the prior corresponding period, represents a significant improvement on the second-half of FY22

• EBITDA of $197m, down 10.6% on the pcp

• Net profit of $17.2m, down -55.2%

• Underlying net profit of $33.7m, down -29.9%

• Underlying net profit was well-below expectations of $24.5m

• Interim dividend of 4.5 cents per share (ex-dividend on March 16th)

The company also flagged it is set to increase costs for chicken in the coming weeks and months.

Cost hikes are needed, Ingham’s says, to cover elevated inputs for feed, ingredients, packaging, fuel and distribution—indicating higher oil prices, for one, are elevating pressure on Ingham’s books. 

Five year price chart for Brent Crude as at 1400AEST Monday 20 Feb 2023 shows how prices remain elevated even "post-COVID" (Source: TradingEconomics)

Quick bite: broker ratings 

Today, we’re looking at what three different brokers think about Ingham’s Group. All three research notes in question were published on Friday 17 February 2023. 

Ingham’s joining the top gainers board on Monday 20 February complicates reporting somewhat, given the unexplained jump takes ING’s share price above each set target. 

All brokers used a closing price of $2.74. 

• Goldman Sachs: SELL. Price target of $2.55 (-6.9%) 

• Macquarie Research: OUTPERFORM. Price target of $2.97 (+13.3%)

• Bell Potter: HOLD. Price target of $2.74 (+10.5%) 

Why is Goldman Sachs bearish? (SELL)

Goldman Sachs analysts Michael Peet and Xavier Harrison are unsatisfied Ingham’s strong earnings result will translate into cash flow benefits in the near-term. 

Most bank analysts use cash flow as something of a proxy for shareholder returns, underscoring the main thrust of Goldman Sachs’ SELL rating. 

If Ingham’s wants to reduce its operating costs, analysts state, the company is in a tricky position that requires it to conversely boost capex on automation. 

• “Headwinds for free cash flow generation include: rising interest costs; continued WC commitments being pushed up by higher COGS; and the commitment to increase capex, required to lift automation capability, which should help reduce operating costs,” analysts wrote. 

• The team also highlighted that Ingahms’ cancellation of an ongoing IT upgrade cost the company A$16m, “as the company looks to prioritise more essential items.” 

• Peet and Harrison further highlighted sticky debt. “We don’t forecast much change in net debt over the forecast period…it’s difficult to see a significant organic reduction in debt in the short term based on the capital requirements listed above.” 

• One positive: the team expects earnings to offset the need to raise capital.

Why is Macquarie bullish? (OUTPERFORM) 

Macquarie analysts specifically working on Friday’s note were not named, however, Macquarie is bullish on ING due to first-half NPAT beating internal forecasts. 

The team also highlighted that ING appears to be recovering from operation disruptions through FY22 quicker than expected. 

The east coast floods of 2022 were a disaster for shareholder confidence in ING. 

• Macquarie highlighted the same headwinds identified by the team at Goldman Sachs, but wrote that “[it] feels like we’re through the worst of it.” 

• Despite the company citing higher feed costs, Macquarie pointed to its internal chicken feed index being -10% lower since a peak in November 2022. Of course, ING will still need to recover those costs. 

• Macquarie Research forecasts FY23 EBITDA of $169m and NPAT of $77m, an upgrade from $160m/$70m respectively. 

Why is Bell Potter on the fence? (HOLD) 

Bell Potter analyst Jonathan Snape saw no reason to upgrade the HOLD rating on Ingham’s, even as first-half NPAT of $26.6m was above internal expectations of $25.1m.

Snape highlighted that despite the promising result, by his count, NPAT vs. 1HFY22 was down -28%. Cost hikes to consumers were also above expectations.

• “Average selling prices rose +8.5% YOY in 1H23 and this was modestly ahead of forecasts, delivering a +28% HOH uplift in EBITDA per kg,” Snape wrote.

• “A lease adjusted operating cash outflow of -$9.8m compares to $29.5m inflow in 1H22.”

• Feed cost inflation is one of the biggest clouds hanging over Ingham’s books. In 1H23, feed cost inflation alone saw the company spending an extra $58m. 

A look at ING's three month charts clarifies the significance of today's move. Volumes today are over 3m, vs a 20 day average of around 810k, suggesting an institutional purchase.