Inghams Group Limited

Strong Core Volumes Driving Growth in a Challenging Environment: Inghams Group Limited (ASX: ING) is involved in the production, processing and marketing of chicken and turkey products. In the feedstock segment, the company manufactures stock feed for poultry, pig, dairy and equine industries.

Change in Substantial Holding: Recently, ING cited that Credit Suisse Holdings (Australia) Limited has become an initial substantial holder of the company, by acquiring 19,670,214 equity shares, resulting in a voting right of ~5.29%.

FY19 Financial Highlights: ING came up with FY19 results for the year ended 30 June 2019 wherein, the revenue stood at $2,489.8 million, up 4.9% y-o-y. NPAT at $126.2 million witnessed a yoy growth of 10.1%. During the year, the company reported EBITDA at $242.2 million, a rise of 14.2% y-o-y while EBITDA margin came in higher at 9.7% as compared to 8.9% on FY18. Total borrowings stood at $398.3 million with net assets at $164.5 million as on June 30, 2019. The management announced a fully franked final dividend of 10.5 cents per ordinary share which is payable on 09 October 2019.


FY19 Financial Highlights (Source: Company Reports)

Operational Performance: Volumes from core poultry came in at 414.9kt, up 4.3% on FY18. Performance in Q4FY19 were softened due to higher processing costs and early signs of margin pressure. Overall core poultry volume grew at 4.3% while feed volume posted a decline of 10% on y-o-y.Within the Australia segment, despite of price competition, retail segment delivered a strong performance. QSR & Food segment performed well, aided by strong demand from food service. Core Poultry volumes in New Zealand came in at 63.6kt, up 0.6% on FY18 while feed volumes declined by 5.1% at 130.3 kt. Operation in New Zealand was hindered by oversupply, resulting in, flat core poultry volumes.

Outlook: The Management expects the poultry demand to be continued as consumers are attracted by the relative affordability of chicken as a healthy protein.The Management cited that the cost of feed is close to its historic high with outlook for pricing into 2H FY2020 dependent upon the next domestic grain harvest. The Management also cited that New Zealand is returning on growth (yoy), however, underlying EBITDA levels in FY20 are expected to be below underlying EBITDA in FY19 and a return to growth is expected in FY21. Dividend policy for FY20 has been amended to pay fully franked dividends of 60-70% of underlying NPAT across the full year (excluding leasing impact).

Stock Recommendation: At the current market price of $3.170, the stock is trading close to the lower end of its 52-week trading range of $3.150- $4.860. The stock experienced a short interest of ~19.404% (as per the ASIC report of 28 August 2019).The stock is available at price to earnings multiple of 9.350x against the industry median of 12.3x.The stock has corrected ~5.62% in last 1-year. The company posted decent set of numbers in FY19 with bottom-line growth of ~10.1% on yoy. The period was also marked by the core volume growth at 4.3%. Growth from Australia was underpinned by strong growth in wholesale and increasing demand for further processed products in the QSR and Food Service channels. Going forward, the Management expects the growth to be continued in FY20. The Management also highlighted that new strategic and operational plan will be presented to the market on 22 October 2019.  Considering the aforesaid facts and current trading levels, we recommend a ‘Hold’ rating on the stock at the current market price of $3.170 on 3 September 2019, up 0.316% on 3 September 2019.
 

Nufarm Limited

Crop Protection to Protect the Portfolio: Nufarm Limited (ASX: NUF) is associated with the manufacturing and marketing of crop protection products in Australasia, Africa, the Americas and Europe. The company has a proprietary seed technologies business and it receives royalty from growers for certain varieties of seed. Recently, NUF has undertaken the placement worth $97.5 million of preference securities (PS) to existing shareholder and strategic business partner, Sumitomo Chemical Company Limited (Sumitomo), through a wholly owned subsidiary (Nufarm Investment Pty Ltd). The transaction will provide strength to the balance sheet of Nufarm as a result of the issue of an equity instrument and will build on the longstanding relationship between Sumitomo and Nufarm.

H1FY19 Performance Highlights: Revenue for 1HFY19 stood at $1,576 million, ~8% on H1FY18, and NPAT on underlying basis at ($11.5) million, down 208% pcp. The company delivered strong performance in North America with ~19% pcp growth followed by ~18% growth in Latin America.  Underlying EBITDA came in at $120.9 million, 2% dip from pcp. EBITDA margin shrank ~7.7% from ~10.7% on H1FY18. The seed technologies segment during the year delivered ~12% growth on FY18. Europe registered a sales growth of ~15% pcp but was negatively impacted by slow start to the season and logistics challenges in acquired portfolios. Increase in net working capital was primarily higher, driven by receivables in North America and Latin America, and inventories across North America and Europe. Company’s debt stood at $1,577 millionas on 31^st December 2018, higher by 61% on H1FY18.


H1FY19 Highlights (Source: Company Reports)

Outlook: The management expects challenging climatic conditions across Australia to continue and impact 2H19 while NUF guided positive outlook for 2H with high moisture levels across most cropping areas. The company expects FY19 EBITDA at around $420 million, revised from the previous EBITDA guidance range of $440-470 million and consensus estimates of $436 Mn. The company expects additional expense of $30 million relate to business restructuring and legal costs associated with the Omega-3 canola patent estate, in the US. The company expects to report net working capital of around $1.6 billion for the year end.

Stock recommendation: The stock of NUF is quoting at $4.730 with a market capitalization of $1.83 billion. The stock experienced a short interest of ~18.75% (as per the ASIC report of 28 August 2019). Currently, the stock is inching towards the lower end of its 52-week trading range which stands at $3.605 - $7.212. Looking at the price movement, the stock has delivered returns of 26.13% and -10.75% in the last three-months and six-months, respectively. With the presence across international markets, the company has potential to deliver improved bottom-line in FY19 aided by high moisture levels across most cropping areas. With the focus to deleverage the balance sheet, reduced capex requirement, decent demand from Europe, North America and Latin America, revise earning outlook, etc., we recommend a ‘Hold’ rating on the stock at the current market price of $4.730, ahead of its full year results which is to be released on 30 September 2019. 

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