Tag: Small Caps

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Costa Group completes 2PH citrus acquisition after successful offering of $190m fund

Investment Thesis

  • Positive thematic play on food supply for a growing global and domestic population.
  • Berries, Mushrooms, Citrus, Tomato and Avocado are five major categories who leads market Positions via the recent acquisition.
  • Near term challenges could persist a little while longer (e.g extreme weather and drought).
  • Balance sheet risk has been removed with the recent capital raising. 
  • Continuation of execution of domestic berry growth program while china berry expansion is gaining momentum.
  • Given the number of downgrades, management will likely need to rebuild trust with its guidance and execution.

Key Risks

  • Weather conditions continue to deteriorate, putting pressure on earnings.
  • Earnings could deteriorate further, putting the balance risk at risk once more.
  • Weather-related crop damage or any significant increase in insurance costs. This risk is mitigated by CGC’s crop insurance (hail, wind, and fire) and structure insurance.
  • Any power outage resulting in crop destruction per incident.
  • Any significant increase in power costs, affecting earnings.
  • Any operational disruption caused by health and safety issues.
  • Any disruptions or problems with water, irrigation, or water recycling.
  • Negotiations with supermarkets giants cole (wesfarmers), Woolworths and independent grocers results in erosion of margins.
  • Increased costs due to lower water allocations.
  • Pricing pressures arising from either competitors or insufficient demand. 

1H21 Results Highlights

  • Revenue of $612.4m was in line with the pcp (or up +1.7 percent in constant currency), driven by International sales, which were up +25 percent due to improved pricing and yield in both regions, offset by Produce revenue, which was down -6.9 percent due to negative impacts in Citrus (Colignan hailstorm damage) and lower Mushroom and Tomato production.
  • EBITDA-S of $124.4 million increased by +4.3 percent. EBITDA-S increased by 9.7 percent in constant currency. Domestic berries outperformed the pcp, but this was offset by poor performance in Citrus, Tomato, and Mushroom, which was hampered by weather/production issues. Avocado performance fell short of expectations due to weak pricing following strong industry volumes.
  • RNPAT-S of $44.4m increased by 3.0% (or 13% in constant currency). Interest costs fell by 13% due to lower base rates and average debt, but were offset by higher D&A (up 2%). CGC also recognised $2.5 million in direct Covid-19 costs.
  • NPAT-S of $44.4m increased by 3.0% (or 13.0% in constant currency). Interest costs fell by 13% due to lower base rates and average debt, but were offset by higher D&A (up 2%). CGC also recognised $2.5 million in direct Covid-19 costs.
  • Declared interim dividend of 4.0cps. Statutory NPAT of $37.5 million.

Company Profile 

Costa Group Holdings Ltd (CGC) grows and markets fruit and vegetables and supplies them to supermarket chains and independent grocers globally. CGC has leading market positions in five core categories of Berries (Blueberries, strawberries and raspberries), Mushrooms, Citrus, Tomato and Avocado via the recent acquisition.

(Source: Banyantree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Shares Small Cap

AUB Group Earnings remain resilient as ever despite uncertainty

AUB brokers derive revenue from commissions paid by insurers, based on gross written premiums. AUB owns or has equity stakes in each broking business within the network.

A key value proposition over smaller brokers is AUB’s ability to negotiate more favourable policy wording and pricing. Scale also provides the capacity to spend more on technology, which helps facilitate greater analytical and processing capabilities, and marketing to help attract and retain customers. Other services such as claims support and premium funding support the value proposition. AUB’s underwriting agencies distribute insurance products but take no underwriting risk. Underwriting agencies act on behalf of insurers to design, develop, and provide specialised insurance products and services.

The earnings outlook is positive. Further insurance price rise is expected by the analysts over the medium term as insurers seek to cover claims inflation and weak investment income. This follows a weak pricing environment due to excess global reinsurance capacity, soft economic conditions, and elevated competition.

Financial Strength:
AUB is in sound financial health. It has strong cash flow generation with a high conversion of earnings to operating cash flow and a relatively high dividend payout ratio. Gearing ratio is reasonable, at 28.5% and below the firm’s maximum 45% ratio. AUB holds AUD 90 million in cash, which when included lowers gearing further. This is excluding customer cash for premium held by AUB but payable to insurers. EBITDA interest covers of over 16 times and the nature of its businesses being relatively low-risk. As per the analysts, AUB would be using operating cash flows to fund increased positions in existing broker partners, with provision to fund small acquisitions from cash on hand.

Bulls Say:
AUB’s scale and expertise in insurance products and services leave it well placed to benefit from higher insurance pricing.
BizCover and the Kelly+ Partners partnership see AUB placed to take market share in the smaller end of the SME market.
The firm’s acquisition strategy, both new investments and increased equity stakes, would boost EPS growth.

Company Profile:
AUB Group is the second-largest general insurance broker network in Australia and New Zealand. It has an ownership in 55 brokerage businesses, which collectively write over AUD 3 billion in premiums. It also owns equity stakes in 27 underwriting agencies. AUB derives revenue from commissions (from insurers, ultimately paid for by AUB’s customers) based on gross written premium, or GWP, from agencies it owns, and a share of profits from associates and joint ventures. GWP is split between personal (6%), small to medium enterprises (68%), and corporates (26%).

(Source: Morningstar)

General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Shares Small Cap

Nanosonics achieved a strong FY21 performance

Investment Thesis

  • Ultrasound disinfection is required. To avoid cross-infection, ultrasound transducers must be disinfected between patients. Trophon EPR outperforms traditional methods (soak, spray, wipe, or other manual reprocessing/disinfection methods). Traditional soaking, for example, takes 25 minutes, whereas Trophon disinfects ultrasound probes in 7-8 minutes.
  • Potential addressable installed base of 120,000 Trophon EPR units worldwide (40,000 each in the US, Europe, and the Rest of the World).
  • Higher level disinfection required to reinforce the drive path for new guidelines and regulations. New Guidelines in Australia and New Zealand for example, establish Trophon as the gold standard in high-level disinfection.
  • Trophon become standard of care and direct sales team driven for strong adoption as its continuous growing in North America.
  • With the demand for safety inventory, GE Healthcare has retained a large and credible distribution partner.
  • In the United Kingdom, the Managed Equipment Service (MES) business model is overcoming client capital budget constraints.
  • Progress is being made in terms of geographic expansion.
  • A strong balance sheet will help to support the growth strategy.

Key Risks

  • Increased competition as new entrance entered the market. 
  • Non-receptive markets where NAN’s product is regarded as excessive when compared to traditional disinfection methods such as using sterile wipes.
  • Key customer risk, as one of NAN’s largest customers
  • Product flaws or incidents that necessitate recalls.
  • Unfavorable foreign currency movements in the AUD/USD.
  • Poor R&D execution with no progress.
  • Because of the nature of the business, it is prone to quickly reaching a natural penetration rate, where growth becomes subdued.

FY21 results highlights

  • Revenue of $103.1m, up +3.0 percent (or +12 percent in constant currency), driven by recovery in 2H21 with revenue of $60.0m, up +39 percent (or +50 percent in CC) compared to 1H21.
  • NAN’s global installed base of 26,750 units increased by +13 percent or 3,030 units (with 2H new installed base increasing by +20 percent compared to 1H21 with 1,650 units installed).
  • Revenue of $76.4m, up +9% from 1H21 revenue of $42.7m, up +27% from 1H21, driven by a recovery in ultrasound procedure volume to pre-Covid-19 levels.
  • Operating profit before tax of $11.0m was -11 percent lower than the $12.4 m pcp, driven by 2H21 profit before tax $10.8m which grew as total revenue increase +39% in 2H21 versus 1H21.
  • NAN retained a strong balance sheet position to fund growth initiative with net cash position improving $4.2 to $96.0m.
  • Revenue of $26.7 million was down -11 percent, but 2H revenue of $17.3 million was up +84 percent compared to 1H21, with installed base growth recovering and GE Healthcare capital purchases increasing.
  • EBIT of $10.8 million fell -7 percent. Operating expenses increased by 12% to $70.8 million, primarily due to $20.3 million in 4Q expenses as NAN returned to its intended investment run rate.
  • The $5.9 million in free cash flow was driven by $8.3 million in 2H free cash flow, which offset a $2.4 million net cash outflow in 2H21.

Company Profile 

Nanosonics Ltd (NAN) is an ASX-listed company which focuses on developing and commercialising infection control devices. NAN’s first device, the trophon® EPR is a proprietary automated device for low temperature, high level disinfection of ultrasound probes. The device is approved for sale across major markets including, Australia and New Zealand, US, Europe, Japan, Hong Kong, and South Korea. The trophon® EPR is sold through distributors including GE Healthcare, Philips, Samsung, Siemens Toshiba and Miele Professional.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Shares Small Cap

SkyCity’s Business to Sit on the Sidelines Amid Travel Restrictions

buoyed by the recovery from current coronavirus-induced lows and solid performance from its core assets in Auckland and Adelaide. SkyCity’s Auckland and Adelaide properties underpin the firm’s narrow economic moat. SkyCity is the monopoly operator in both jurisdictions, with long-dated licences (exclusive licence for Auckland expires in 2048, and Adelaide licence expires in 2085 with exclusivity guaranteed until 2035). The quality of these assets, particularly SkyCity Auckland, has helped build the firm’s VIP gaming business.

SkyCity’s exposure to the volatile VIP gaming market is smaller than that of Australian rivals Crown Resorts and Star Entertainment. VIP revenue typically represents over 20% of Crown’s and Star’s sales, compared with SkyCity’s typical 10%-15%. While high rollers have no alternatives when in Auckland or Adelaide, SkyCity effectively competes as a destination casino on a global scale against locations such as The Star in Sydney and Crown Melbourne. This includes a NZD 750 million upgrade to SkyCity Auckland to be completed by the end of calendar 2024 and a AUD 330 million expansion for SkyCity Adelaide, a transformational project completed in fiscal 2021.

Financial Strength 

Despite near-term earnings weakness, SkyCity’s balance sheet remains robust, bolstered by a NZD 230 million capital raise completed at the end of fiscal 2020 and extensions to new and existing debt facilities. As expected, SkyCity declared a final dividend in the second half of fiscal 2021, following the June 30, 2021 covenant testing date. We expect SkyCity’s balance sheet to continue to improve over coming years as earnings recover, with net debt/EBITDA dropping below 1.0 in fiscal 2024 as expansionary projects roll off and earnings recover. 

Our fair value for SkyCity to NZD 3.80, from NZD 3.50, following the release of fiscal 2021 results. The raise on our fair value estimate is principally due to a more positive outlook on capital expenditure as SkyCity’s major expansion projects roll off and insurance payments are set to cover the majority of growth expenditure earmarked for the next three years. Despite New Zealand recently shifting back into stage 4 lockdown, SkyCity’s longdated and exclusive licences in Auckland and Adelaide create a regulatory barrier to entry, underpinning the firm’s narrow moat, and position the business well to participate in the recovery as restrictions ease. 

The payout ratio is well-supported by SkyCity’s balance sheet. The completion of the NZD 330 million Adelaide expansion in fiscal 2021 takes some pressure off cash flows, and of the further NZD 500 million in capital expenditure flagged for the NZICC project, around NZD 380 million will be funded by insurance payments to be received following the NZICC fire. The NZD 750 million NZICC/Horizon Hotel project (which helped secure licensed exclusivity at the core Auckland casino) has been delayed by a fire, with completion now expected in late calendar 2024.

Bulls Say’s 

  • Long-dated exclusive licences to operate the only casino in Auckland and Adelaide allow SkyCity to enjoy economic returns in a regulated environment.
  • We expect transformative capital expenditure at SkyCity’s Auckland and Adelaide casinos will lead to a sizable step-up in earnings.
  • SkyCity is well positioned to benefit from the emerging middle and upper class in China.

Company Profile 

SkyCity Entertainment operates a number of casino-hotel complexes across Australia and New Zealand. The flagship property is SkyCity Auckland, the holder and operator of an exclusive casino licence (expiring in 2048) in New Zealand’s most populous city. The company also owns smaller casinos in Hamilton and Queenstown. In Australia, the company operates SkyCity Adelaide (exclusive licence expiring in 2035).

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Shares Small Cap

Improvements in occupancy to be the major driver for driving up G8 revenues

Investment Thesis

  • Trading at a discount to our valuation.
  • With a growing population, the long-term outlook for childcare demand remains positive (organic and net immigration).
  • Increased emphasis on both organic and acquired growth.
  • Increasing exposure to international markets (Asia).
  • Strategic investor China First Capital Group (12.45% stake in GEM) may see a collaborative expansion into the Chinese market.
  • The Company’s national footprint enables it to scale more effectively than competitors and mom and pop shops.
  • A global operator could be interested in acquiring the company.
  • Improve occupancy levels by leveraging – (rough estimates) A 1% increase in occupancy equates to $10-11 million in revenue and a $3 million EBIT benefit.

Key Risks 

  • The company faces execution risk in meeting its FY19 earnings per share (EPS) target.
  • Pricing pressure is being exerted as a result of increased competition.
  • Increased supply in some areas has resulted in lower occupancy rates.
  • Acquisition with a negative impact on value (s).
  • Execution risk associated with offshore expansion.
  • Childcare funding cuts or adverse regulatory changes
  • Australia is experiencing a recession.
  • Dividend reduction

FY21 Result Highlights

  • Revenue of $421.5 million (vs. $308.2 million in CY20 H1 and $429.9 million in CY19 H1) reflects occupancy recovery and the effects of greenfield growth, Victorian Government Covid-19 payments, and the February fee review, offset by divestments.
  • GEM saw an increase in national Core average occupancy to 68.0 percent (from 65.1 percent in CY20 H1), but it remains below pre-Covid levels of 70.4 percent in CY19 H1.
  • Operating EBIT (after lease interest) of $38.9m was up from $19.7m in CY20 H1 (restated) and in line with $38.8m in CY19 H1 (restated), owing to the “benefits of the Improvement Process, February fee review, and greenfield growth being invested in increasing system support and quality.” 
  • The statutory NPAT of $25.1 million was an improvement over the net loss after tax of $244 million.
  • GEM’s balance sheet remains strong, with a net cash position.
  • GEM did not pay an interim dividend, but the Board “expects dividend payments to resume with a full-year CY21 dividend to be paid in CY22.”
  • GEM’s employee remediation programme is well-advanced, with a provision of $80 million pre-tax ($57 million after tax), less costs incurred to date.

Company Profile 

G8 Education Limited (GEM) owns and operates care and education services in Australia and Singapore through a range of brands. The Company initially listed on the ASX in December 2007 under the name of Early Learning Services, but later merged with Payce Child Care to become G8 Education.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Expert Insights Shares Small Cap

Ampol the Latest to Join the Energy M&A Frenzy with Bid for No-Moat Z Energy

Word equity under magnifying glass --- Image by © Image Source/Corbis

in line with the Ampol’s bid. The decline in value is in accord with the terms of a proposed merger and our prior standalone fair value estimates. Merger and acquisition activity continues at a frenetic pace in the Australasian fossil fuel space, coronavirus fragility and carbon concerns marking some as prey. Ampol is proposing an NZD 3.78 per share cash offer for Z Energy via scheme of arrangement. Australia’s largest refined fuel retailer has been granted a four week-exclusivity period in which to undertake due diligence prior to formalising the offer for its smaller New Zealand counterpart.

The equity issuance may take the form of partial share consideration to Z shareholders. Or Ampol may simply conducting a pro rata entitlement offer to its own shareholders, which would be done following regulatory approval and nearer the date of completion. Ampol may have to sell-down some NZ assets to meet NZ competition guidelines. This could include its Gull network. With Ampol shares falling on the bid news, and Z Energy shares rising but not meeting the bid price, the implication is the market on balance thinks Ampol is paying too much, or at least that the bid won’t succeed. The natural question is how do we reconcile this with our much higher standalone valuation for Z.

Company’s Future Outlook 

Despite there being no certainty that discussions will result in a binding agreement, we think the chance of success is high. The latest is apparently the fourth in a series of nonbinding offers from Ampol, including at NZD 3.35, NZD 3.50, and NZD 3.60 along the way. And there is logic to a merger– Ampol and Z have very similar business models. Z Energy’s board wouldn’t have opened the books if the chance of a deal proceeding was low. At NZD 3.78 Ampol will be getting Z Energy at a material 33% discount to our NZD 5.60 standalone fair value. 

Our formal recommendation for Z shareholders is don’t accept, based solely upon the offer’s material discount to our NZD 5.60 standalone fair value. However, we suspect that advice is likely to prove academic. Z shares rose just over 14% on the day to NZD 3.48, though still 8% below the proposed bid level. They have moved just into 4-star territory from 3-star prior. Z Energy shares have been in the doldrums for over two years given intense retail fuel competition in New Zealand, more recently exacerbated by COVID-19 disruption.

The shares have fallen from a peak of NZD 8.65 and have only recently show signs of life from NZD 2.56 lows. Ampol’s most recent offer price represents a 24% premium to the last NZD 3.04 close. We suspect there is Z Energy shareholder fatigue that might help Ampol’s offer along. However, if Ampol’s bid were to fall over, our stand-alone Z Energy fair value estimate is unchanged at NZD 5.60.

Company Profile 

Z Energy was born of the purchase of Shell New Zealand’s downstream operations by Infratil and the New Zealand Superannuation Fund in 2010. It has since transitioned to New Zealand’s largest stand-alone retailer of refined petroleum products and meets close to half of the nation’s transport fuel requirements, serving both retail and commercial customers. The principal activities of Z Energy are importing, distributing and selling transport fuel and related products. The business has scale and sells a full range of transport fuels.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Philosophy Shares Small Cap Technical Picks

Pact Group’s stock price has risen as a result of a 100% dividend increase.

Investment thesis

  • Strong market share in Australia, with a strong influence in Asia. As a result, it offers appealing exposure to the growth of both developed and emerging markets.
  • The corporation’s newly appointed CEO brings a fresh perspective on company strategy, which can restructure the company for strong volume growth.
  • Based on our projections, the valuation is reasonable.
  • Going forwards, management appears to be less centred on acquired growth, implying that the Company is less likely to make a value-destroying acquisition.
  • The reintroduction of the dividend is a positive sign that management is optimistic about future earnings growth.
  • In an environmentally friendly market, focusing on sustainable packaging.

Key Risks

The following are the key challenges to the investment thesis:

  • Increased competitive pressures, resulting in further margin erosion.
  • Cost pressures on inputs that the corporation would be unable to pass on to users.
  • A worsening in Australia’s and Asia’s economic conditions.
  • The risk of emerging markets.
  • Poor acquisitions or failure to meet synergy targets as PGH shifts away from packaging for food, dairy, and beverage clients and towards more high-growth sectors such as healthcare.
  • Negative currency movements (purchased raw materials in U.S. dollars)

Highlights of key FY21 results

  • Revenue fell -3 percent to $1,762 million, while underlying EBITDA increased by 4% to $315 million, underlying EBIT increased by 10% to $183 million (EBIT margin increased by 120 basis points to 10.4 percent), and underlying NPAT increased by 28% to $94 million. The positive motivational drivers of group EBIT growth over the year were: margin improvement (+$10m) as a result of disciplined raw material input cost management; volume growth in Packaging & Sustainability (+$9m); and volume increase in Materials Handling & Pooling (+$15m).
  • As a result of strong operating performance and working capital management, cash flow performance improved, with free cashflow increasing by +44 percent to $104 million. 
  • Balance sheet gearing decreased slightly year on year, working to improve to 2.4x (within the targeted range of 3.0x) from 2.6x. The company has $317 million in liquid assets (undrawn debt capacity). 
  • Strong capital returns, with a +120bps increase in ROIC to 11.8 percent. The Board declared a final dividend of 6cps (65 percent franked), helping to bring the year’s total dividends to 11cps (vs 3cps in the pcp).

Company Description  

Pact Group Holdings Ltd (PGH) was established by Raphael Geminder in 2002 (Mr. Geminder remains a major shareholder with ~44% and is the brother in law of Anthony Pratt, Chairman of competitor Visy). Pact has operations throughout Australia, New Zealand and Asia and conceives, designs and manufactures packaging (plastic resin and steel) for many productsin the food (especially dairy and beverage), chemical, agricultural, industrial and other sectors. 

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Shares Small Cap

Inghams delivered a strong result in spite of national lockdowns in Australia and NZ

Investment Thesis 

  • The pricing condition is improving.
  • The largest integrated poultry producer in Australia and New Zealand.
  • Additional asset sales are planned.
  • Project Accelerate has proven to be effective in increasing labor productivity and automation, resulting in increased earnings despite lower revenue.
  • Procurement measures are being executed, and the results are meeting expectations.
  • Investing in Australia and New Zealand plants to boost capacity and capabilities across the board.
  • With a healthy balance sheet, capital management measures are high on the agenda.

Key Risks

  • Re-negotiation of important contracts with significant clients on less favourable terms.
  • Increased feed and electricity costs, which could be passed on to customers through market price hikes, lowering competitiveness.
  • Uncertainty arises from the lack of information on the appointment of a new CEO.
  • In QSRs (Quick Service Restaurants) and supermarkets, there is a risk of customer concentration.
  • Exotic disease outbreaks are a risk, limiting ING’s ability to produce poultry goods.
  • From the parent stock provider, there has been a significant decline in volume and quality.
  • Material disruptions in ING’s intricate and interconnected supply chain.

Key FY21 group results 

Despite the impact of Covid-19, ING delivered solid FY21 results that were in line with management’s recent guidance (EBITDA & NPAT) issued on May-21. In comparison to the previous year, group revenue increased by +4.4 percent (with Core Poultry volumes increasing by +4.2 percent, with volume growth in NZ exceedingly strong at +6.3 percent), underlying EBITDA increased by +9.6 percent, and underlying NPAT increased by +57.4 percent. Coverage expansion in wholesale and recovery in the QSR and food service channels drove top-line growth. Total dividends increased +17.9 percent year on year to 16.5cps, representing a payout ratio of 71 percent after earnings growth (in line with policy targets of 60 – 80 percent of underlying NPAT post AASB 16 adjustments). The balance sheet is in excellent shape, with net debt falling by -23.7 percent to $240.2 million in the last year. Group leverage fell from 1.8x to 1.2x, well within management’s 1.0–2.0x target range.

Company Description  

Inghams Group Ltd (ING) is Australia and New Zealand’s largest integrated poultry producer. The Company produces and sells chicken, turkey and stock feed that are used by the poultry, pig, dairy and equine industries. Over one quarantine facility, over ten feed mills, over 74 breeder farms, over 11 hatcheries, over 225 predominantly contracted broiler farms, over seven primary processing plants, over seven further processing plants, over one protein conversion plant, and over nine distribution centres are among the Company’s operations in Australia and New Zealand. Ingham’s and Waitoa are two of the company’s brands.

Source: (BanayanTree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Shares Small Cap

HT&E Limited (ASX: HT1)

  • Additional cost savings, notably a large reduction in corporate overhead expenditures.
  • The ATO and HT1 are anticipated to reach an agreement in the near future.
  • Changes in media ownership rules could lead to more corporate activity. Upside to the valuation of Soprano (25% interest) 
  • Initiatives for capital management that are still in progress.
  • A solid financial statement.

Key Risks

  • Decline in advertising dollars (radio and outdoor), particularly if Australia’s retail industry is under stress.
  • The structure of radio is being disrupted.
  • Increased tender competition from large players.
  • With worldwide expansion, there is a danger of poor execution.
  • The tax liabilities of the Australian Taxation Office materialize at a higher level than expected by the market.
  • Hong Kong could detract from the group’s performance (Corona virus or protests escalate).
  • Lockdowns relating to Covid-19 are being reintroduced around the country.

1H CY21 group results 

HT1 had a great first half of the year, owing to a solid market recovery. Core revenue increased by 18.2 percent to $109.9 million, underlying EBITDA increased by 55.9% to $30.4 million, underlying EBIT increased by 139.5 percent to $23.7 million, and NPAT increased by 352.8 percent to $16.3 million. On a like-for-like basis, group sales increased by 21%, owing to higher consumer confidence and advertising spend in Australia and Hong Kong. Higher cost of sales (ongoing investment in digital audio capability) and the resumption of marketing and certain discretionary spending that were deferred to the pandemic in the pcp drove up operating costs (up +9% vs pcp, or up +12% on a similar basis). The Board reinstated the dividend and announced a fully franked interim dividend of 3.5cps vs. zero in the PCP due to strengthening market circumstances.

Company Description  

HT&E Limited (HT1) is a media and entertainment company with operations in Australia, New Zealand and Hong Kong. The Company operates the following key segments: (1) Australian Radio Network (ARN) – metropolitan radio networks including KIIS Network, The Edge96.One and Mix106.3 Canberra; (2) Hong KongOutdoor (Cody) – Billboard, transit and other outdoor advertising in Hong Kong, with over 300 outdoor advertising panels and in-bus multimedia advertising across 1,200 buses; and (3) Digital Investments – digital assets including iHeartRadio, Emotive and Conversant Media.   

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Shares Small Cap

Oversupply Issues Are Behind Inghams, but Mix Shift to Drag in the Near Term

competition in poultry is intense. Poultry is largely commoditised, and Inghams possesses limited opportunity to differentiate its products, leading to our view that the firm lacks a sustainable competitive advantage required to award an economic moat. Further, Inghams’ customer base is highly concentrated, with the majority of its total sales comprising five customers, including supermarket giants Woolworths and Coles, and quick-service restaurant KFC. Population growth, relative affordability, and changes in consumer preferences have driven chicken consumption to all-time highs in Australia and New Zealand. 

Per capita chicken meat consumption in both Australia and New Zealand has steadily grown at a low-single-digit CAGR over the last decade. Chicken remains the cheapest meat by a significant margin, with the per-kilo retail price of chicken less than half that of pork, lamb, and beef. This price advantage is supported by favourable production dynamics, notably chicken’s superior food conversion ratio, or FCR. The chicken industry remains highly efficient in translating feed into live weight for production, with producers able to convert feed at a rate that is about 1.5 times more efficient than pork and 4 times more efficient than beef. The chicken FCR, measured by kilograms of feed required to produce one kilogram of meat, has fallen from over 2.5 in 1975 to less than 1.8 today.

Financial Strength 

Given relatively high lease-adjusted leverage, and slim operating margins, we rate Inghams’ balance sheet as weak–stronger than poor as we do not see risk of a dilutive capital raising. Net debt/EBITDA improved in fiscal 2020 to 1.2 at June 30, 2021, due principally to earnings recovery and tighter capital expenditure amid COVID-19 uncertainty over the year. This is down from 1.8 in fiscal 2020 and 1.3 in fiscal 2019 following the capital return and share buyback over fiscal 2019. Given heavy investment into automation and operational efficiency, capital expenditure requirements have been elevated, peaking at AUD 106 million during fiscal 2019 at 4% of revenue. 

Our fair value estimate for Inghams to AUD 3.70 from AUD 3.60 due to the time value of money boost to our financial model. Inghams’ fiscal 2021 underlying net profit of AUD 87 million matched our estimates and was at the top end of management’s guidance range. Inghams declared a fully franked final dividend of AUD 9 cents, bringing the full-year distribution to AUD 16.5 cents per share, implying a payout ratio of 71% of underlying EPS. Government-imposed shutdowns shift poultry demand from restaurants to retail, creating inefficiencies as Inghams is forced to adjust production lines. 

Poultry producers struggled to keep up with pantry-stocking and panic buying in March and April 2020, but this sales momentum was not maintained, and the poultry industry entered fiscal 2021 in oversupply. The chicken industry remains highly efficient in translating feed into live weight for production, with producers able to convert feed at a rate that is about 1.5 times more efficient than pork and 4 times more efficient than beef–leading to cost-efficient processing and a smaller environmental footprint. We expect low-single-digit growth in annual per capita chicken meat consumption to 53kg by fiscal 2026, before moderating as chicken consumption approaches saturation.

Bulls Say’s 

  • Inghams benefits from a consumer trend toward protein-rich, fresh, easy-to-prepare meals.
  • Per-capita chicken meat consumption continues to rise as chicken enjoys a relative affordability advantage compared with other meats, such as beef.
  • A shift in Inghams’ sales mix to value-added products could enhance margins.

Company Profile 

Inghams is the largest vertically integrated poultry producer in Australia and New Zealand. The firm enjoys a number-one position in Australia with approximately 40% market share and a number-two position in New Zealand with around 35% share. Inghams supplies poultry products, notably to major Australian supermarkets Woolworths and Coles, and quick-service restaurants McDonalds and KFC. Sales are heavily skewed toward poultry, which includes the production and sale of chicken and turkey products.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.