• Document: Inghams Group. Ruling the roost A$3.06 AUSTRALIA. Ingham s is the Australian market leader and #2 in NZ. Positive earnings momentum
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AUSTRALIA Inghams Group Ruling the roost We initiate coverage on Inghams Group with an Outperform recommendation and a target price of $3.65 per share. Ingham’s is the Australian market leader and #2 in NZ Ingham’s is the market leader in the Australian chicken market with a 40% share (by value). It is the #2 player in the NZ market (34% share) and Ingham’s is the only dual Australian and NZ chicken producer. Australia and NZ are both highly regulated markets, which limits the extent of imports. Ingham’s has a vertically integrated operation across the poultry supply chain along with a stockfeed business (13% of ING AU Outperform sales). Ingham’s has long-term customer relationships and multi-year contracts with major retailers and Quick Service Restaurants (QSRs). Price (at 05:10, 19 Dec 2016 GMT) A$3.06 Ingham’s provides exposure to ANZ poultry consumption which has grown at 4.1% Valuation A$ 3.37-3.96 and 5.1% CAGR respectively between 1990 and 2015 (OECD). Solid growth in - EV/EBITA 12-month target A$ 3.65 consumption is expected to continue driven by chicken’s cheap relative cost 12-month TSR % +25.1 compared to other meat categories and health and wellness considerations. Volatility Index Low/Medium Positive earnings momentum GICS sector Food, Beverage & Tobacco Strong volume growth and benefits from Ingham’s cost out and efficiency program Market cap A$m 1,165 (Project Accelerate) are the key drivers of forecast 13.5% EBITDA growth in FY17e. 30-day avg turnover A$m 2.5 This follows 46% EBITDA growth in FY16. Ingham’s 8.0% EBITDA margin (FY17e) is Number shares on issue m 380.7 substantially below closest comp Tegel. We see the potential for this gap to narrow over time notwithstanding that NZ is a structurally more profitable market than Investment fundamentals Year end 30 Jun 2017E 2018E 2019E 2020E Australia. Revenue m 2,375.0 2,422.0 2,467.6 2,508.8 EBIT m 147.9 158.6 165.9 170.2 Strong cash flow generation and solid dividend in prospect Reported profit m 45.3 106.4 112.0 115.9 Adjusted profit m 98.9 106.4 112.0 115.9 Ingham’s is a highly cash flow generative business. We estimate 103% of average Gross cashflow m 141.1 156.4 165.6 170.6 cash flow conversion (adjusted proforma) between 2014 and 2016 and with 101% CFPS ¢ 37.1 41.1 43.6 44.9 CFPS growth % nmf 10.8 5.9 3.0 conversion expected in FY17e. Ingham’s has a target dividend payout range of 65- PGCFPS x 8.2 7.4 7.0 6.8 70% of NPAT and FY17e dividend is expected to be franked. EPS adj ¢ 26.0 28.0 29.5 30.5 EPS adj growth % nmf 7.6 5.2 3.5 Target price of $3.65 per share PER adj x 11.8 10.9 10.4 10.0 Total DPS ¢ 11.5 19.0 20.0 20.7 Our price target of $3.65 per share is at the midpoint of our A$3.37-$3.96 equity Total div yield % 3.8 6.2 6.5 6.8 Franking % 100 100 100 100 valuation range for Ingham’s based on an EV/EBIT methodology. The low end of our ROA % 14.8 15.8 16.2 16.3 FY17e EV/EBIT range of 11.5x-13.0x is broadly in line with the peer group and c10% ROE % 59.7 57.5 50.2 44.5 EV/EBITDA x 6.1 5.6 5.3 5.2 above Tegel. Implied FY17e PE range is 13.0x-15.2x. In our view, a premium to Net debt/equity % 238.9 185.8 150.5 121.9 Tegel is justified for a range of reasons. These include: 1) Ingham’s relative scale P/BV

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