Strong maiden result for Inghams

Inghams offers investors both yield and growth. Trading on an FY17F PE of 12.8x and an annualised dividend yield of 5.3% fully franked, we believe that ING is undervalued. The next catalyst for the stock is ASX300 and possibly ASX200 index inclusion with the March review.

Result beat expectations

Despite a challenging New Zealand market due to market oversupply and a weak wholesale market in Australia, ING's 1H17 result beat expectations.

Solid earnings growth (EBITDA +9.1% on pcp) reflected strong demand for poultry driven by consumer preference for healthier (leaner) white meat, poultry being the cheapest and most versatile protein and Project Accelerate benefits which saw margins rise (EBITDA margin was 7.8% vs 7.4% the pcp).

ING is on its way to transitioning from a family-run business to a modern, efficient FMCG business. Proforma operating cashflow was up on the pcp (+10.8% on pcp) and the dividend beat our forecast at 2.6cps ff (Morgans was 2.0cps). Capex peaked in the 1H17 and net debt is expected to fall in the 2H17.

ING is well positioned to deliver solid earnings growth

1H17 EBITDA represented 50% of ING’s full year guidance. However the prospectus said that FY17 EBITDA would be weighted 45-48% in the 1H17 and 52-55% in the 2H17 due to the timing of Project Accelerate benefits. We therefore believe that full year guidance is conservative, with risk to the upside.

Our FY17 NPAT forecast remains unchanged however in line with the 1H17 trends, we have lowered our New Zealand forecast and increased our Australian forecast.

The slight revisions to our FY18 and FY19 NPAT forecasts are due to higher depreciation expense. Over the forecast period, we forecast double digit NPAT growth driven by solid demand for poultry and the expected margin improvement associated with Project Accelerate.

Investment view

ING is one of our key picks in the Ag/Food sector. Our positive view is based on ING being the market leader of a domestic protein growth story in an industry where there are clear barriers to entry, its scale gives it bargaining power with customers, Project Accelerate should underpin solid EPS growth and it has a well-respected management team.

ING offers investors both yield and growth. Trading on an FY17F PE of 12.8x and an annualised dividend yield of 5.3% fully franked, we believe that ING is undervalued. The next catalyst for the stock is ASX300 and possibly ASX200 index inclusion with the March review.

Key risks include the market power of the major retailers, loss of a major contract, inability to pass on feed costs, disease, increased competition, changes to import regulation, supply chain disruption and not delivering on Project Accelerate.

Contributed by Belinda Moore, Senior Analyst, Agriculture, Food & Beverage, Travel. Original blog here