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Please refer to page 110 for important disclosures and analyst certification, or on our website
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AUSTRALIA
ING AU Outperform
Price (at 05:10, 19 Dec 2016 GMT) A$3.06
Valuation A$ 3.37-3.96 - EV/EBITA
12-month target A$ 3.65
12-month TSR % +25.1
Volatility Index Low/Medium
GICS sector Food, Beverage & Tobacco
Market cap A$m 1,165
30-day avg turnover A$m 2.5
Number shares on issue m 380.7
Investment fundamentals Year end 30 Jun 2017E 2018E 2019E 2020E
Revenue m 2,375.0 2,422.0 2,467.6 2,508.8 EBIT m 147.9 158.6 165.9 170.2 Reported profit m 45.3 106.4 112.0 115.9 Adjusted profit m 98.9 106.4 112.0 115.9 Gross cashflow m 141.1 156.4 165.6 170.6
CFPS ¢ 37.1 41.1 43.6 44.9 CFPS growth % nmf 10.8 5.9 3.0 PGCFPS x 8.2 7.4 7.0 6.8 EPS adj ¢ 26.0 28.0 29.5 30.5 EPS adj growth % nmf 7.6 5.2 3.5 PER adj x 11.8 10.9 10.4 10.0
Total DPS ¢ 11.5 19.0 20.0 20.7 Total div yield % 3.8 6.2 6.5 6.8 Franking % 100 100 100 100 ROA % 14.8 15.8 16.2 16.3 ROE % 59.7 57.5 50.2 44.5 EV/EBITDA x 6.1 5.6 5.3 5.2 Net debt/equity % 238.9 185.8 150.5 121.9
P/BV x 7.0 5.7 4.8 4.2
Source: FactSet, Macquarie Research, December 2016
(all figures in AUD unless noted)
21 December 2016 Macquarie Securities (Australia) Limited
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
sales). Ingham’s has long-term customer relationships and multi-year contracts with
major retailers and Quick Service Restaurants (QSRs).
Ingham’s provides exposure to ANZ poultry consumption which has grown at 4.1%
and 5.1% CAGR respectively between 1990 and 2015 (OECD). Solid growth in
consumption is expected to continue driven by chicken’s cheap relative cost
compared to other meat categories and health and wellness considerations.
Positive earnings momentum
Strong volume growth and benefits from Ingham’s cost out and efficiency program
(Project Accelerate) are the key drivers of forecast 13.5% EBITDA growth in FY17e.
This follows 46% EBITDA growth in FY16. Ingham’s 8.0% EBITDA margin (FY17e) is
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
Australia.
Strong cash flow generation and solid dividend in prospect
Ingham’s is a highly cash flow generative business. We estimate 103% of average
cash flow conversion (adjusted proforma) between 2014 and 2016 and with 101%
conversion expected in FY17e. Ingham’s has a target dividend payout range of 65-
70% of NPAT and FY17e dividend is expected to be franked.
Target price of $3.65 per share
Our price target of $3.65 per share is at the midpoint of our A$3.37-$3.96 equity
valuation range for Ingham’s based on an EV/EBIT methodology. The low end of our
FY17e EV/EBIT range of 11.5x-13.0x is broadly in line with the peer group and c10%
above Tegel. Implied FY17e PE range is 13.0x-15.2x. In our view, a premium to
Tegel is justified for a range of reasons. These include: 1) Ingham’s relative scale
advantage, including exposure to the larger Australian market, 2) potential to narrow
margin differential, and 3) a lower reliance on export markets for future growth.
Key risks
Key risks include customer concentration with Ingham’s Top 5 customers, which represent
55-60% of sales (FY16a) and risk that cost save benefits from Project Accelerate are
competed away over time. There is risk of disease which if eventuated could significantly
impact Ingham’s supply chain and production, although this risk is mitigated by strict
quarantine procedures and import restrictions. Ingham’s business is highly integrated and
small changes or variances in upstream areas of the business such as breeder eggs,
hatcheries and broiler farms can have a compound effect down the chain. Ingham’s has
highlighted price competition in the wholesale market which could persist for longer than
expected coupled with its major Australian competitor being unlisted.
Macquarie Wealth Management Inghams Group
21 December 2016 2
Inside
Investment summary 3
Executive summary 6
Valuation 16
Growth opportunities 22
Risks 27
Financials 30
Company Overview 49
Market structure & channel 69
ANZ poultry industry overview 74
Appendix: Global poultry industry 84
Summary of Peer Companies 87
Inghams Group Company profile
Ingham’s is the largest vertically integrated chicken and turkey producer
across Australia and New Zealand, with approximately 8,200 employees and
sales of A$2.3bn in FY16. Ingham’s holds the #1 and #2 positions amongst
chicken producers in Australia and New Zealand with 40% and 34%
estimated chicken market share, respectively, and is a key supplier to major
retailers, QSR operators, foodservice distributors and wholesalers in both of
those markets.
In addition to chicken, Ingham’s holds strong market positions across
Australian turkey, the Australian stockfeed and the New Zealand dairy feed
industries
Fig 1 Ingham’s operations overview
Source: Ingham’s company data, Macquarie Research, December 2016
Macquarie Wealth Management Inghams Group
21 December 2016 3
Investment summary Consistent growth in poultry consumption over time
Australian & New Zealand poultry consumption has grown around 4.1% and 5.1% CAGR
respectively between 1990 and 2015 (OECD).
This has been driven by the cheap relative cost compared to other meat categories, health
& wellness considerations as well as population growth. We see solid growth in chicken
consumption continuing and Ingham’s provides positive leverage to this theme.
Favourable market structure
Ingham’s is the market leader in the Australian chicken market with a 40% share by value
(Ingham’s estimate). It is the #2 player in the NZ market (34% share by value) and
Ingham’s is the only dual Australian and NZ chicken producer. These markets are
relatively well consolidated, with the top two players in Australia having a combined 73%
market share. The top two players in NZ have a combined 82% share.
Long-term customer relationships and multi-year contracts
Ingham’s has a long established track record supplying large customers including two of its
largest customers for 48 and 55 years. In our view, Ingham’s has the scale and breadth of
operations to deliver high-quality, reliable supply to the large retailers and QSRs. Over the
last 18 months, Ingham’s has been focused on entering into contracts with key customers;
these are typically for 2-3 years and in a number of cases a percentage of customer
volumes are secured. The contracts contain various degrees of pass-through provisions
including for feed costs and mechanisms for cost review.
Highly regulated markets
We note there are significant import restrictions in the Australian/New Zealand market with
no imports of live birds or fresh product (exports of latter now possible from NZ into
Australia under strict guidelines). In contrast, we note that European and United States
markets are typically free to import and export poultry. Australian regulations have recently
changed to allow uncooked poultry imports from NZ. We think that shelf life and logistics
considerations along with much lower retail poultry prices in Australia relative to NZ, are
likely to limit the extent of NZ imports although there may be opportunities for imports of
partially cooked and frozen product. As the only major poultry producer with production
facilities in both markets, Ingham’s believes it is well placed to benefit from any
opportunities arising from this change.
Vertically integrated operation
Ingham’s has a highly integrated supply chain with control of breeder farms, egg
hatcheries, a strong contract grower base and downstream processing. In our view, there
are significant lead times involved in increasing chicken production and Ingham’s
effectively controls this process along with flexibility to adjust to market conditions (e.g.
adjusting broiler holding period and egg inventories). This large scale, integrated position
gives Ingham’s a cost advantage over smaller and more regional suppliers.
Stockfeed business provides security of supply with external sales adding scale
Ingham’s estimates it is the second largest stockfeed manufacturer in Australia by volume
with around 10% market share. Ingham’s stockfeed business (13% of group FY16 sales)
provides security of feed supply for the poultry business and currently meets ~85% of
internal feed demand requirements. This also allows Ingham’s to control the composition
and quality of its feed which is key to minimising its feed to conversion ratio. Internal sales
account for approximately 60% of overall stockfeed production volume with 40% external.
External sales provide the business with additional scale and network utilisation which
delivers cost and efficiency benefits for the overall stockfeed operation.
There are significant
import restrictions
in Australian/New
Zealand market
Ingham’s large
scale, integrated
position provides a
cost advantage over
smaller and more
regional suppliers.
Macquarie Wealth Management Inghams Group
21 December 2016 4
Strong management with relevant experience
CEO Mick McMahon has been at Ingham’s for the last 18 months and has overseen the
operational turnaround. Mr McMahon joined Ingham’s in January 2015 as Executive
Chairman and was appointed CEO in February 2016. He has extensive public market
experience (CEO of Skilled Group between 2010 and 2014) and was also COO of Coles
Supermarkets Australia from 2007-2009 (we view this retail experience as valuable given
the importance of the retail customer base). This followed a 19-year career at Shell.
CFO Ian Brannan joined Ingham’s in May 2015. Most recently Mr Brannan was CFO of
GWA Group Limited and prior to that Carter Holt Building Supplies Group. Ian has had
extensive senior management experience in Australia, USA and UK including in the FMCG
sector (Arnotts, Sara Lee).
Shift to greater value add products over time
Ingham’s has capitalised on market trends and driven growth in free range and value-
enhanced products. Free range and value enhanced products have increased from 1%
and 15% respectively of Ingham’s FY05 chicken sales to 12% and 22%, respectively, of
FY16 sales. Correspondingly, further processed sales have reduced from 34% to 28% of
chicken sales and primary processed from 50% to 38% of chicken sales. Free-range and
value-enhanced products attract a price premium hence there is a positive mix effect.
Greater corporate focus and move to a national based model
Ingham’s has invested more than $900m in the last decade to enhance its production and
processing network across Australia and New Zealand. We note that this was partly
realised with the recent sale and leaseback initiative. In the last two years under TPG
ownership, Ingham’s has been in transition from a family-owned business to a more
corporate-focused entity. As part of this, it has moved to a national-based model from prior
state based approach as well as making changes to operational footprint. This has seen
Ingham’s focus on South Australia and Queensland as its prime processing manufacturing
locations and closure of the Cardiff plant in NSW. Ingham’s has increased capacity in
SA/QLD along with significant investment in automation. This has seen substantial scale
and efficiency benefits accrue.
Significant cost out and efficiency program
Ingham’s state that it is part way through a significant cost out program (“Project
Accelerate”) driven by reduced overheads, greater automation and improved labour
productivity and efficiencies. Ingham’s expects Project Accelerate to deliver $160-200m of
gross benefits over the five years commencing in FY16 with around half of the benefits
expected to accrue beyond FY17. Hence, whilst Accelerate is a key earnings driver in
FY17, management expect that additional cost savings will contribute to profit growth
beyond this period.
Potential to narrow margin gap to Tegel over time
Ingham’s achieved EBITDA margins of 7.3% in FY16 which is expected to increase to
8.0% in FY17. This is below Tegel’s 12.9% and 13.7% EBITDA margins in FY16a and
FY17e respectively (Tegel PDS forecast). In our view this difference largely relates to a
more favourable industry structure in New Zealand (NZ) and lower cost base (NZ is 86% of
Tegel’s FY15 revenue compared to 15% of Ingham’s revenue). We see the potential for
Ingham’s to narrow this gap over time. Delivery of targeted cost saves and ongoing strong
poultry demand growth are key to this.
Strong earnings growth forecast to continue in FY17
Resolution of a number of internal and external factors that impacted poultry product
volumes and severely impacted margins in FY15, together with early benefits of Project
Accelerate benefits, saw Ingham’s bounce back with 46.3% EBITDA growth in FY16.
EBITDA growth of 13.5% is forecast in FY17 driven by a further ramp-up in Project
Accelerate savings along with strong forecast volume poultry growth of 7.7%.
Ingham’s is part way
through a
significant cost out
program driven by
reduced overheads,
greater automation
and improved
labour productivity
and efficiencies.
Macquarie Wealth Management Inghams Group
21 December 2016 5
Strong cash flow generation and solid franked dividend in prospect
In our view, Ingham’s is a highly cash-flow-generative business with 103% of average cash
flow conversion (adjusted proforma) between 2014 and 2016 and with 101% conversion
expected in FY17. Ingham’s has a target dividend payout range of 65-70% of NPAT. The
first dividend to shareholders will be determined in respect of period from completion to 24
December 2016 and will become payable in March 2017. Ingham’s expects to be in a
position to frank dividends.
Key Risks
Inability to pass on feed costs
Ingham’s has a good track record in recovering feed costs and a number of Ingham’s
major customer contracts have provisions that allow for feed rise and fall recovery.
However there is risk of a lack of recovery in the event of volatile movements in feed costs
which would compress margins. We note that spot A$ wheat prices are 21% below the
five-year average and A$ spot soy prices are 2% below the five-year average.
Retail concentration
Retail and QSRs account for 59% and 14% of Australian poultry industry sales
respectively. Ingham’s Top 5 customers represent 55-60% of group sales (FY16a). This
represents a relatively concentrated customer base. There is a risk of volume losses or
margin pressure as contracts come up for renewal in what is a competitive industry.
Risk that Ingham’s cost saves are competed away over time
In our view, Coles and Woolworths continue to impose significant pressure on the
consumer supply chain. Poultry is not immune from this but the risk is mitigated by the
importance of poultry in driving volume growth in the overall “fresh” category which in turn
is a broader traffic driver for the major retailers. A lack of integrated producers, Ingham’s
superior scale and very limited imports (regulatory driven) are also mitigating factors. In our
view, realisation of ongoing cost savings represents an earnings buffer against further
potential price erosion.
Agricultural and disease risk
There is risk of disease which if eventuated could significantly impact Ingham’s supply
chain and production. We note there has been very limited incidence of this and this risk is
mitigated by strict quarantine procedures and import restrictions.
Supply chain interruption
Ingham’s business is highly integrated and small changes or variances in upstream areas
of the business such as breeder eggs, hatcheries and broiler farms can have a compound
effect down the chain. Ingham’s has an ability to mitigate this via adjusting broiler holding
period and egg inventories for example.
Competition risks
We note that in both Australia and New Zealand there are also a number of smaller market
participants with potential ability to pressure industry pricing. Ingham’s largest competitor in
Australia is Baiada. Baiada is a private company hence there is less pressure to deliver
short-term results.
Benefits from transformation projects may be delayed or less than expected
Management has estimated the quantum and timing of Project Accelerate benefits as well
as the capital investment required. Cost overruns, a failure to complete the transformation
program or delays may impact implementation of Project Accelerate and actual cost
savings and efficiencies achieved may differ from forecasts.
A slowdown in poultry consumption growth rates
The poultry industry is subject to changing consumer trends, demands and preferences,
including changing tastes and dietary habits of consumers and general economic
conditions. There is a risk that poultry consumption growth rates could slow down over
time.
Ingham’s Top 5
customers
represent 55-60% of
sales (FY16a). This
represents a
relatively
concentrated
customer base
Macquarie Wealth Management Inghams Group
21 December 2016 6
Executive summary
Fig 2 ANZ poultry consumption Fig 3 Aust & NZ poultry consumption has had a 3.6% CAGR over last 10 years
Source: OECD, December 2016 Source: OECD, December 2016
Fig 4 …and Australia’s biggest share of meat plate… Fig 5 …having outpaced other categories
Source: OECD, December 2016 Source: OECD, December 2016
Fig 6 Poultry wins on relative affordability (Australia) Fig 7 ….and is a cheap source of protein
Source: ABS, December 2016 Source: Macquarie analysis of retail pricing, g protein/100g sourced from
Food Standards Australia New Zealand, December 2016
1,144kt
194kt
0
200
400
600
800
1,000
1,200
1,400
1,600
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020f
Australia New Zealand
2015 ANZ Total: 1,339kt
kt
3.1%
4.8%
4.0%
2.0%
6.8%
5.8%
1.8% 1.8%
3.6%
4.9%
3.6%
2.0%
0%
1%
2%
3%
4%
5%
6%
7%
8%
1995 2005 2015 2024f
Australia NZ ANZ
10yr CAGR to...
Poultry, 1,144kt, 42%
Beef, 781kt, 28%
Pork, 622kt, 23%
Lamb, 202kt, 7%
2.8mt meat consumed
in 2015
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Poultry Beef Pork Lamb
0%
50%
100%
150%
200%
250%
300%
350%
1980 1985 1990 1995 2000 2005 2010 2015
Poultry Pork Beef Lamb
$6.54
$13.56
$16.67
$19.16
2.9¢
6.1¢ 6.1¢
8.8¢
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
$0
$5
$10
$15
$20
$25
$30
Chicken Pork Beef Lamb
¢ / protein gram (RHS)$/kg
Macquarie Wealth Management Inghams Group
21 December 2016 7
Fig 8 Poultry accounted for 87% of FY16a revenues Fig 9 Australia the largest end market with 83% of FY16a revenues
Source: Ingham’s company data, December 2016 Source: Ingham’s company data, December 2016
Fig 10 Ingham’s has an extensive integrated network
Facilities / farms1 Australia NZ Total
Quarantine 1 0 1
Feedmill 8 2 10
Breeding farms 60 14 74
Hatchery 10 1 11
Broiler farms
2,3 188 37 225
Primary processing3 6 1 7
Further processing 5 2 7
Distribution centre 7 2 9
Protein conversion plant 1 0 1
Total 286 59 345
1. Includes Turkey and 4 contracted NZ breeder farms. Does not account for breeder and hatchery expansion projects approved or underway. Excludes Leppington R&D facility, non-operational sites and offices. Farming areas shown for illustrative purposes only. 2. Includes contracted growers and company owned farms 3. Excludes Cardiff primary processing plant and associated contracted growers
Source: Ingham’s company data, December 2016 Source: Ingham’s company data, December 2016
Poultry, A$2,013.7m
, 87%
Stockfeed, A$293.1m,
13%
Other , A$1.9m, 0%
FY16aRevenue:
A$2,308.7m
Australia, 83%
NZ, 15%
Exports, 2%
FY16aRevenue:
A$2,308.7m
Macquarie Wealth Management Inghams Group
21 December 2016 8
Fig 11 Australia market structure and comparison vs. Baiada. Top 2 players have a 73% share.
Ingham’s Baiada
Market share (value) 40% 33%
Key poultry brands Ingham’s Steggles
Lilydale
Footprint Nation wide Nation wide
Product range Chicken Chicken
(external sales) Turkey Turkey
Stockfeed Stockfeed
Ingredients Ingredients
Vertical integration
Quarantine facility Yes No
Internal feed operations Yes Yes
Breeder farms Yes Yes
Hatcheries Yes Yes
Primary Processing Yes Yes
Further Processing Yes Yes
Smallgoods Yes Yes
Source: Ingham’s company data, December 2016
Fig 12 NZ market structure and comparison vs. Tegel. Top 2 players have an 82% share.
Tegel Ingham’s
Market share (value) 48% 34%
Key poultry brands Tegel Ingham’s
Top Hat Waitoa
Tegel Free Range
Rangitikei
Footprint North Island North Island
South Island
Product range Chicken Chicken
(external sales) Stockfeed Stockfeed
Ingredients Ingredients
Turkey
Vertical integration
Internal feed operations Yes Yes
Breeder farms Yes Yes
Hatcheries Yes Yes
Primary Processing Yes Yes
Further Processing Yes Yes
Smallgoods Yes No
Source: Ingham’s company data, December 2016
The Australian and New Zealand poultry markets are relatively consolidated, with Ingham’s
and Tegel accounting for combined 73% and 82% share of Australian and NZ market,
respectively. This combined Top 2 market share has remained relatively stable in each
market over the last five financial years.
Inghams40%
Baiada33%
Other27%
Australian Chicken Market Share (by value)
Tegel48%
Ingham's 34%
Other18%
NZ Chicken Market Share (by value)
Macquarie Wealth Management Inghams Group
21 December 2016 9
Fig 13 Retail dominates Australian chicken distribution channel
Fig 14 Chicken distribution channels – NZ
Source: Ingham’s company data, December 2016 Source: Ingham’s company data, December 2016
Fig 15 EBITDA margins of peer group
Source: Macquarie Research, Factset, Tegel PFI forecasts, December 2016
Our analysis shows Ingham’s margins are at a ~560bp discount to Tegel (FY16a) and are
similar to Scandi Standard and LDC and below Tyson Foods, Pilgrim’s Pride and
Sanderson. In relation to Tegel, this difference largely relates to a more favourable industry
structure in New Zealand (NZ) and a lower labour cost base (NZ is 86% of Tegel’s FY15
revenue and NZ is 15% of Ingham’s revenue), we see the potential for Ingham’s to narrow
this gap over time. Delivery of targeted cost saves and ongoing strong poultry demand
growth are key to this.
Retail59%Wholesale
20%
Foodservice7%
QSR14%
Estimated share of industry (%) based on revenue in FY16
Retail45%
Wholesale29%
Foodservice10%
QSR16%
Estimated share of industry (%) based on revenue in FY16
7.3%8.0%
12.9% 13.4%
8.2% 8.5%7.3% 7.4%
14.7%
12.2%
14.7%
12.4%
7.2%
9.8%
0%
2%
4%
6%
8%
10%
12%
14%
16%
FY16a FY17e FY16a FY17e FY15a FY16e FY16a FY17e FY15a FY16e FY15a FY16e FY16a FY17e
Ingham's* Tegel Scandi Standard
LDC SA Pilgrim's Pride
SandersonFarms
Tyson Foods^
EBITDA margin
Ingham’s margins
are at a ~560bp
discount to Tegel.
We see the potential
for Ingham’s to
narrow this gap
over time.
Macquarie Wealth Management Inghams Group
21 December 2016 10
Fig 16 Strong cash conversion
Source: Macquarie Research, December 2016
Ingham’s generates strong operating and free cashflow conversion. The strong cashflows
support investment in the underlying asset base as well as targeted 65-70% dividend
payout ratio as a percentage of NPAT. Ingham’s expects to be in a position to frank
dividends.
Growth opportunities Ingham’s management sees growth opportunities in:
Capturing underlying market and category growth;
Driving innovation and premiumisation;
Selectively targeting export growth; and
Realising margin expansion opportunities through Project Accelerate
Ingham’s has invested more than $900m in the decade to enhance its production and
processing network across Australia and New Zealand. However, given expectation of
solid ongoing volume growth (7.7% poultry volume growth forecast in FY17), Ingham’s has
committed capital to increase capacity and improve efficiency in the feed milling, breeder
and hatchery networks. Investment has been allocated in the following areas:
Construction of a new feed mill in South Australia
Expansion of the breeder network in South Australia, Queensland and New Zealand;
Expansion of Murraylands hatchery in South Australia; and
Construction of a new hatchery in New Zealand
Fig 17 Investment in new capacity*
Network Region Description Estimated completion Status FY16A FY17F
Breeder SA New sheds, shed extensions and equipment upgrades to increase capacity FY17 Commenced Breeder SA Greenfield farms to increase capacity FY17 Commenced Breeder QLD Greenfield farms to increase capacity FY18-19 Board approved Hatchery SA Building and equipment to increase capacity FY17 Commissioned Feedmill SA Greenfield mill to increase capacity and replace third party supply FY18 Tender awarded Breeder NZ Greenfield farms to increase capacity FY17-18 Board approved Hatchery NZ Greenfield hatchery to increase capacity FY17 Board approved
Total $35m $95m
Source: Ingham’s company data, December 2016
98.2%
121.7%
93.3%101.0%
73.6%
99.5%
51.3%56.3%
0%
20%
40%
60%
80%
100%
120%
140%
FY14a FY15a FY16a FY17e
%
Adjusted EBITDA operating cashflow conversion Adjusted free cashflow conversion
Ingham’s generates
strong operating
and free cashflow
conversion
Macquarie Wealth Management Inghams Group
21 December 2016 11
Fig 18 Ingham’s asset base is currently ~75% utilised across the value chain, with planned capital expansions and latent capacity available for future growth (~25%)
Type Existing facilities
Investments in capacity
Quarantine 1 n/a
Feedmill 10 Greenfield feedmill in SA
Breeding farms 74 3 new breeder systems
Hatchery 11 SA hatchery capacity expansion; Building greenfield facility in NZ
Broiler farms 225 Secured contracts equivalent to an additional
150 sheds nationally
Primary processing 7 Investments in automation
Further processing 7 Investments in automation
Distribution 9 n/a
Protein conversion plant 1 n/a
Source: Ingham’s company data, December 2016
Significant cost out and efficiency program
Ingham’s commenced Project Accelerate in May 2015 and is currently focussed on the
following initiatives.
Investment in automation;
Labour and productivity improvements;
Procurement savings;
Network rationalisation;
Warehousing and logistics savings; and
Improvement in the turkey and smallgoods business.
Management are in the second year of a transformation program which is expected to
deliver $160-200m of gross benefits over the five years commencing in FY16. Around half
of Project Accelerate benefits are expected to accrue beyond FY17. Hence, whilst
Accelerate is a key earnings driver in FY17, management expect that additional cost
savings will contribute to profit growth beyond this period.
Strong earnings growth forecast to continue in FY17
Ingham’s delivered 46.3% EBITDA growth in FY16 driven by early benefits from Project
Accelerate along with solid volume growth (poultry volumes +4.5%) and normalisation of
genetic supply and operational planning issues encountered in FY15. Hence FY16 was
effectively a bounce-back year as Ingham’s resolved a number of internal issues together
with efficiency benefits and solid volume growth. EBITDA growth of 13.5% is expected in
FY17 driven by a further ramp-up in Project Accelerate savings along with strong forecast
volume poultry growth of 7.7%.
77%
98%
81%
96%
82%
69%
23%
2%
19%
4%
18%
31%
24%
24%
18%
16%
29%
25%
0% 20% 40% 60% 80% 100% 120% 140%
Feed
Breeder
Hatchery
Broiler
Primary plant
Further processing
Current utilisation Latent capacity Planned expansion Extended shifts
Management are in
the second year of a
transformation
program which is
expected to deliver
$160-200m of gross
benefits over the
five years
Macquarie Wealth Management Inghams Group
21 December 2016 12
Our retail supplier benchmarking shows Ingham’s margins are at the lower end of the range
Fig 19 Supplier EBIT margin FY14: 8.3% Avg Fig 20 Supplier EBIT margin FY15: 7.7% Avg
Source: Macquarie Research, Public company data and ASIC accounts, December 2016
Source: Macquarie Research, Public company data and ASIC accounts, December 2016
We have undertaken a benchmarking of margins for key suppliers to the Australian retail
sector. Ingham’s EBIT margins of 3.6% and 5.8% in FY15 and FY16 respectively compare
to our sample mean of 7.7% in FY15. We note that FY16 represents a more normal year
for Ingham’s, post resolution of some internal issues in FY15. Companies such as Asaleo,
Lion, Coca-Cola Amatil and Mars are at the upper end (>10% EBIT margins) which reflects
strong branded goods nature. We note that most of Ingham’s sales are unbranded.
Conversely dairy companies are at the bottom of the range.
The key point is that Ingham’s is not “over-earning” relative to other retail suppliers.
Hence in our view this creates a defendable margin scenario when negotiating key terms
re price / volume with major customers. This is also in the context of the importance of
poultry in the broader fresh category which is a major focus area for the retailers. Indeed
chicken products represent two of the top five fresh products sold by the four largest
Australian supermarkets by sales.
Importance of fresh category to retailers
We highlight the following comments from Wesfarmers/Coles and Woolworths over the last
year. This emphasises price investment being made in lowering chicken prices as well as
the importance of the overall fresh category (which includes poultry) in terms of driving
sales growth including number of customer visits and size of basket.
Wesfarmers/Coles:
February 2016 - “During the half, we backed up our focus on customer service with
continued investment in lowering prices. Chicken breasts and drumsticks went from
$13 and $5.30 a kilo to $9 and $3.50, respectively….roast chicken from $11 to $8”.
“There's still lots of fresh food opportunity, quite a number of our customers still buy their
fresh food products elsewhere.”
August 2016 – “We've been working closely with suppliers to improve the quality and
availability of our fresh food. Our customers have been noticing with our keep fresh metrics
of items per basket, basket size and transactions per week continue to grow in quarter
four. We also continue to lower the price of the fresh products our customers buy the most,
including whole chickens and chicken schnitzel.”
Woolworths:
February 2016 - “It’s important to work on our fresh side of the business or good for you
type of food products”
August 2016 – “The key thing you build your foundations on are the three parts of your
customer value proposition, which are around your prices, your service and fresh”.
0%
5%
10%
15%
20%
25%
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Mean Median
Supplier EBIT margin (FY14)
0%
2%
4%
6%8%
10%
12%
14%
16%
18%
20%
Murr
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Mean Median
Supplier EBIT margin (FY15)
Ingham’s is not
“over-earning”
relative to other
retail suppliers. In
our view this
creates a
defendable margin
scenario
Macquarie Wealth Management Inghams Group
21 December 2016 13
Shift to greater value add products over time drives positive mix effect
Free range and value enhanced products have increased from 1% and 15% respectively of
Ingham’s FY05 chicken sales to 12% and 22% respectively of FY16 chicken sales.
Correspondingly, further processed sales have reduced from 34% to 28% of sales and
primary processed from 50% to 38% of sales.
Fig 21 Ingham’s chicken net sales by category: Free range and value enhanced a bigger part of the mix
Source: Ingham’s company data, December 2016
The primary processed category includes chilled chicken products such as whole birds or
primary cuts (e.g. breast, thigh, drumsticks). Value enhanced relates to chilled products
with additional flavouring including marinades and coatings (kebabs, peri chicken,
flavoured chicken pieces). Further processed includes products that are partially or fully
cooked such as chicken nuggets, chicken tenders and Chicken Kiev.
Price trends
Free-range and value-enhanced products attract a price premium hence there is a positive
mix effect which is shown below.
Fig 22 Premium pricing for Free Range & Organic chicken breast over primary processed breast
Fig 23 Further Processed products attract a varying premium over breast fillet depending on product
Source: Macquarie Research analysis of Grocery Cop data, December 2016
Source: Macquarie Research analysis of Grocery Cop data, December 2016
Our retail price benchmarking shows that free range and organic chicken breast generates
a 65% and 250% premium over primary processed chicken breast.
Primary processed, 50%
Primary processed, 38%
Free range, 1%Free range, 12%
Value enhanced, 15% Value enhanced, 22%
Further processing, 34%
Further processing, 28%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY05a FY16a
$9.0
65%
250%
$0
$5
$10
$15
$20
$25
$30
Primary Processed Free Range
Organic
$/kg
$9.0
40%
120%
190%
$0
$5
$10
$15
$20
$25
$30
Primary Processed Breast
Ingham'sBreast Nuggets
Ingham's Breast Tenders
Ingham's Chicken Kiev
$/kg
Macquarie Wealth Management Inghams Group
21 December 2016 14
Ingham’s further processed products attract a substantial premium above primary
processed breast fillet. This reflects a branded premium as well as further processing in
the form of cooking, chopping, shaping and crumb coating (also includes gluten-free
product). We note the range of premium across categories varies significantly. Ingham’s
breast tenders and Chicken Kiev have a ~120% and 190% premium over chicken breast
fillet while chicken nuggets was only ~40%, however the quality of the contained meat is
likely lower.
Fig 24 Poultry absolute retail price change 2014 – 2016; weakness in primary but growth in value added
Fig 25 Ingham’s category-weighted retail price change 2014 - 2016
Source: Macquarie Research analysis of Grocery Cop data, December 2016
Source: Macquarie Research analysis of Grocery Cop data, December 2016
Our retail pricing analysis shows a ~8.5% decline in primary processed chicken prices from
January 2014 to August 2016, a ~6% increase in value-added products, and a ~3%
decline in further processed products. Hence pricing in the value add category has
increased in last two years whilst further processed category has held up relatively well.
We note that in FY15, Ingham’s highlighted an increase in average poultry pricing which
included a change in product mix towards higher-value products (value enhanced and
further processed).
Taking a weighted average of Ingham’s product categories (40% primary which includes
10% free range assumed as part of primary, 18% value added, 22% further processed),
results in a price decline of ~2.9% which compares with ABS CPI data that shows a
decline of ~4.5%.
Fig 26 Market feed and poultry CPI… Fig 27 …vs Ingham’s revenue
Source: ABS, Factset (Feed price indices include 65% wheat, 35% soymeal), December 2016
Source: Ingham’s company data, ABS, Factset (Feed price indices include 65% wheat, 35% soymeal), December 2016
(8.5%)
6.1%
(2.9%)
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
Primary processed Value added Furtherprocessed
(3.4%)
1.1%
(0.6%)
(2.9%)
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
Primary processed
(40%)
Value added (18%)
Furtherprocessed
(22%)
Ingham's product category weighted
price change
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
Aus feed price Australia Poultry CPI (RHS)
-10.1%-10.6%
0.5%
-3.2%
1.2%2.1%
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
Avg Feed Price Index Avg Poultry CPI Index Ingham's Aus Rev
FY15 FY16
Macquarie Wealth Management Inghams Group
21 December 2016 15
We note that part of the reduction in primary processed prices reflects lower feed costs
(including wheat and soymeal) which have declined ~25% since January 2014.
Ingham’s Australian revenue growth of 2.1% in FY16 outpaced poultry industry price
declines (ABS CPI data) due to strong volume growth of 5% driven in particular by BBQ
bird and chicken breast categories. Ingham’s Australian revenue was down 1% in FY15
due to genetics supply and planning issues which saw a 1.7% decline in poultry volumes.
We note that Ingham’s Australian pro forma revenue grew at 1.2% and 2.1% in FY15 and
FY16 respectively and is forecast to grow at 2.5% in FY17. Hence Ingham’s revenue
growth has been positive despite a 3-5% decline in Australian Poultry CPI over the last two
years. This differential reflects strong volume growth with a 5.1% increase in group
(Aust/NZ) poultry volumes in FY16 and 7.7% forecast volume growth in FY17.
Ingham’s revenue
growth has been
positive despite a 3-
5% decline in
Australian Poultry
CPI over the last two
years
Macquarie Wealth Management Inghams Group
21 December 2016 16
Valuation Our valuation range of $3.37 - $3.96 per share and price target of $3.65 are derived from
applying an EV/EBIT valuation methodology to FY17 forecasts with the price target at the
midpoint of our valuation range. Our earnings-based valuation has been cross-checked
with a DCF valuation of $3.90 per share.
Fig 28 Valuation range of $3.37 - $3.96 per share with $3.65 price target
$m Low High
Equity valuation based on FY17e EV/EBIT $3.37 $3.96 FY17e EV/EBIT 11.5x 13.0x FY17e EV/EBITDA 8.9x 10.1x FY17e PER 13.0x 15.2x Pro-forma Div yield @ 67.5% payout of NPAT 5.5% 4.2% DCF Equity Valuation $3.90 per share
Source: Macquarie Research, December 2016
In arriving at our valuation range we have compared Ingham’s to other Australian/New
Zealand listed primary food, aquaculture and other processed FMCG companies. We have
also assessed Ingham’s valuation range against a range of international listed poultry
producers. Among Aus/NZ companies considered, we have also looked to Ridley (RIC-
AU), the closest comp (and competitor) for Ingham’s external stockfeed business.
Tegel is the closest comparable, in our view, given the similarity of its operations and
overlap in the New Zealand market. There are a number of pure play poultry producers in
international markets. However different market structures and exposure to import
competition limit their usefulness in our view.
We have elected to value Ingham’s by applying an EV/EBIT methodology, in line with how
we value most other industrial companies in our emerging leader universe.
Fig 29 Selected peer EV/EBIT multiples
Source: Macquarie Research, Factset, December 2016
The midpoint of our FY17e EV/EBIT range of 11.5x -13.0x is in line with the broader peer
group and the low end is c15% above Tegel. In our view, a premium to Tegel is justified for
a range of reasons. These include:
Ingham’s relative scale advantage. Ingham’s provides exposure to the larger
Australian poultry market. Ingham’s scale advantage relative to Tegel is evident in
poultry volumes processed. Tegel processed 88kt of poultry in FY16, equating to
~20% of Ingham’s (440kt). We note that Return on Tangible Assets (ROTA) for both
Ingham’s and Tegel are similar, with Ingham’s having a higher asset turn but Tegel a
higher margin.
9.8
x
10.3
x
10.4
x
11.6
x
11.8
x
14.5
x
17.0
x
5.9
x
7.3
x
8.2
x
9.4
x
10.4
x
12.8
x
17.0
x
13.6
x
13.0
x
12.2x
10.1x
0x2x4x6x8x
10x12x14x16x18x Val range Group avg
FY
17f E
V/E
BIT
In arriving at our
valuation range we
have compared
Ingham’s to other
Aus/NZ listed
primary food,
aquaculture and
other processed
FMCG companies
Tegel is the closest comparable in our view given the similarity of its operations and overlap in the New Zealand market.
Macquarie Wealth Management Inghams Group
21 December 2016 17
Scope for a narrowing margin differential. At the group level, Ingham’s margins are
~560-570bp below Tegel’s. This gap is unlikely to completely converge given structural
differences between the Australian and NZ markets (industry structure, labour rates
and FCR partially offset by higher feed costs and lower scale advantages). In our view,
Project Accelerate should drive further cost savings and efficiencies beyond FY17 (half
of overall benefits expected beyond FY17), which combined with ongoing strong
chicken consumption should lead to incremental margin improvement.
Ingham’s has a lower reliance on export markets for future growth. About 17.5%
of Tegel’s FY16 revenues were generated from export markets. In contrast, exports
accounted for only ~2% of Ingham’s FY16 revenue. Reliance on export markets leaves
Tegel vulnerable to supply/demand imbalances across a range of poultry exporting
countries. We note recent changes in regulations which now allow uncooked poultry
imports from NZ to Australia. This may see additional exports from Tegel into Australia
although shelf life and logistics considerations along with substantially lower Australian
retail poultry prices vs NZ, are likely to limit the extent of this. These changes may also
provide opportunities for Ingham’s NZ manufacturing base.
Fig 30 Ingham’s vs Tegel
Ingham’s Tegel*
Group NZ Segment A$ NZ Segment NZ$ NZ$
FY17e Revenue $m 2375 371.7 388.4 625 FY17 Revenue growth* 2.9% 5.1% 1% 7.6% FY14-17e revenue CAGR 2.1% 3.2% 6.5% FY17e EBITDA $m 190.1 37 38.7 84 FY17 EBITDA growth 13.5% 7.6% 12.0% FY14-17e EBITDA CAGR 10.2% 17.3% FY17e EBITDA % 8.0% 10.0% 13.4% FY16 pro forma Net debt $418m $118m Gearing (FY16 Net debt /EBITDA) 2.5x 1.6x Gearing (FY16 Net debt /FY17e EBITDA)
2.2x 1.4x
FY16 ROA 15.3% 8.5% FY16 ROTA 15.3% 16.50%
Source: Ingham’s company data, Tegel company data based on PFI*, December 2016. All comparisons done on a 52-week basis
The low end of our EV/EBIT valuation range is also ahead of international poultry
providers. We believe this is justified given lower volatility of earnings and competition
compared to North American and European Suppliers.
The high-end of our valuation range is broadly consistent with Costa Group. We believe
this is appropriate given a similar reliance on the supermarket channel, market strength in
core basket categories and relatively low agricultural risk.
The high end of our valuation range is broadly in line with the All industrials ex-Financials
and LPTs.
It is also worth noting that our FY17e based valuation only captures around 50% of
Project Accelerate targeted savings ($160-200m gross).
Our EV/EBIT based valuation implies an EV/EBITDA multiple of 8.9x-10.1x and a PE
multiple of 13.0x-15.2x.
The lower end of our implied PE valuation range of 13.0x (FY17e) is similar to Tegel which
reflects Ingham’s greater gearing at 2.2x net debt to EBITDA (net debt to FY17e EBITDA)
vs Tegel’s 1.4x on same basis.
It is also worth
noting that our
FY17e based
valuation only
captures around
50% of Project
Accelerate targeted
savings ($160-200m
gross)
Macquarie Wealth Management Inghams Group
21 December 2016 18
Fig 31 Selected peer EV/EBITDA multiples Fig 32 Selected peer PE multiples
Source: Macquarie Research market multiples, Other data Factset consensus forecasts, December 2016
Source: Macquarie Research market multiples, Other data Factset consensus forecasts, December 2016
See Figure 35 below for Meat processing transaction multiples (domestic and global). We
note that there have been few relevant corporate transactions in recent years. JBS
acquired Primo Smallgoods for $1.45b in Australia in March 2015 (9.7x trailing EBITDA). In
June 2013, TPG acquired Ingham’s for a 4.8x trailing EBITDA in what was a subdued
period for market buy-out activity.
7.4
x
7.4
x
7.8
x
8.2
x
8.8
x
9.1
x
11.7
x
4.4
x
5.0
x
5.9
x
6.5
x
7.6
x 9.8
x
11.5
x
10.9
x
9.5
x
8.6x
7.3x
0x
2x
4x
6x
8x
10x
12x
14x Val range Group avg
FY
17f E
V/E
BIT
DA
13.1
x
13.9
x
13.9
x
15.5
x
15.6
x
19.0
x
19.7
x
9.9
x
10.6
x
10.7
x
12.9
x 19.3
x
20.4
x
17.5
x
16.7
x
15.8x14.0x
0x
5x
10x
15x
20x
25x Val range Group avg
FY
17f P
E r
atio
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Fig 33 Ingham’s valuation comparables
Fiscal period
Price Market value
Enterprise value
Net Debt/ EBITDA
PER EV/ EBITDA EV/EBIT Div Yield EBIT margin EBITDA margin ROA ROIC
FY0 FY1 FY2 FY1 FY2 FY1 FY2 FY1 FY1 FY2 FY1 FY2 FY0 FY0 Primary Comparables Ingham’s Limited 28/06/2016 3.08 1171 1582 2.5x 11.8x 11.0x 8.2x 7.4x 10.6x 9.8x 5.6% 6.2% 6.5% 8.0% 8.6% 16.2% 27.9% Tegel Group Holdings 10/23/2016 1.32 470 612 2.1x 13.1x 11.8x 7.4x 7.0x 9.8x 9.1x NA 9.5% 9.8% 12.6% 12.8% 2.9% 3.4% Costa Group Holdings 06/26/2016 3.33 1,128 1,233 1.3x 19.7x 17.4x 11.7x 10.5x 17.0x 15.6x 3.2% 7.5% 7.9% 10.4% 10.9% 4.5% 5.7% Asaleo Care 06/30/2016 1.56 861 1,154 2.0x 13.9x 12.9x 8.8x 8.3x 11.6x 10.8x 6.3% 15.6% 16.4% 20.6% 21.3% 8.8% 10.7% Tassal Group 06/30/2016 4.21 632 774 1.7x 13.9x 12.4x 7.8x 7.0x 10.4x 9.2x 3.8% 15.7% 16.4% 20.8% 21.6% 7.1% 10.1% Huon Aquaculture Group
06/30/2016 3.91 342 407 2.8x 19.0x 11.4x 8.2x 5.7x 14.5x 8.4x n.a. 9.7% 15.1% 17.1% 22.3% 0.8% 1.2%
Ridley 06/30/2016 1.32 407 450 0.8x 15.5x 13.9x 7.4x 6.4x 10.3x 8.8x 2.9% 4.5% 4.7% 6.2% 6.4% 5.6% 8.8% Select Harvests 06/30/2016 6.59 484 553 0.7x 15.6x 14.0x 9.1x 8.1x 11.8x 10.4x 6.8% 17.1% 18.3% 22.2% 23.4% 7.2% 9.6% Average 1.8x 15.8x 13.4x 8.6x 7.6x 12.2x 10.3x 4.6% 11.4% 12.7% 15.7% 17.0% 5.3% 7.1% International Comparables Tyson Foods 10/01/2016 90.00 31,819 39,990 1.6x 12.9x 12.6x 7.6x 7.6x 9.4x 9.4x 0.9% 8.1% 7.9% 10.0% 9.8% 7.8% 11.2% Pilgrim's Pride 09/25/2016 26.39 6,633 7,910 0.9x 9.9x 9.0x 5.9x 5.2x 7.3x 6.3x n.a. 9.4% 10.1% 11.6% 12.2% 13.7% 20.9% Sanderson Farms 10/31/2016 131.87 2,999 2,671 - 10.6x 11.7x 4.4x 4.5x 5.9x 6.3x 1.0% 9.5% 7.8% 12.6% 10.8% 14.1% NA Hormel Foods 07/24/2016 49.91 26,414 26,440 0.0x 20.4x 19.7x 11.5x 11.0x 12.8x 12.2x 1.5% 14.8% 14.8% 16.5% 16.4% 13.4% 18.9% JBS 09/30/2016 4.73 13,503 34,682 4.9x n.a. 6.8x 6.5x 4.9x 10.4x 6.9x 3.3% 4.3% 5.9% 6.9% 8.3% (0.5%) (0.8%) Scandi Standard 09/30/2016 8.52 512 759 3.3x 19.3x 14.2x 9.8x 8.2x 17.0x 13.1x 3.3% 4.6% 5.5% 8.0% 8.8% 4.8% 6.5% LDC SA 08/31/2016 141.03 2,357 2,146 -0.6x 10.7x 10.4x 5.0x 4.7x 8.2x 7.7x 1.5% 4.7% 4.7% 7.6% 7.7% 6.3% 13.0% Average 1.7x 14.0x 12.1x 7.3x 6.6x 10.1x 8.8x 1.9% 7.9% 8.1% 10.5% 10.6% 8.5% 11.6% Domestic Defensives Coca-Cola Amatil 07/01/2016 10.27 7,844 9,441 1.3x 18.0x 17.7x 9.1x 8.8x 12.7x 12.3x 4.7% 12.9% 12.9% 18.2% 18.2% 6.5% 10.7% DuluxGroup 09/30/2016 6.41 2,495 2,873 1.5x 17.5x 17.1x 11.3x 10.6x 13.1x 12.6x 3.6% 11.9% 11.9% 13.8% 14.1% 11.1% 17.6% Metcash 10/31/2016 2.32 2,262 2,495 0.9x 11.6x 10.6x 6.8x 6.0x 8.2x 7.4x n.a. 2.0% 2.0% 2.4% 2.5% 4.5% 9.6% Pact Group 06/30/2016 6.79 2,031 2,564 2.4x 17.7x 15.6x 10.2x 9.1x 13.6x 12.0x 3.5% 12.4% 12.8% 16.5% 16.8% 6.7% 9.8% Wesfarmers 06/30/2016 43.49 49,185 56,125 1.4x 16.9x 16.0x 9.6x 9.0x 12.4x 11.7x 4.6% 6.1% 6.2% 8.0% 8.1% 1.0% 1.4% Woolworths 06/26/2016 24.08 31,019 34,854 1.0x 19.1x 17.7x 9.4x 8.7x 13.3x 12.3x 3.7% 4.2% 4.4% 5.9% 6.1% 8.0% 14.9% Average 1.4x 16.8x 15.8x 9.4x 8.7x 12.2x 11.4x 4.0% 8.3% 8.4% 10.8% 11.0% 6.3% 10.7% Market All industrials ex-financials 2.7x 17.5x 16.2x 10.86x 10.13x 13.6x 12.6x 4.4% 9.5% 8.8% ASX ex-100 6.3x 16.7x 14.3x 9.5x 8.2x 13.0x 11.3x 3.3% 6.0% 6.4%
Source: Macquarie Research, Factset, Tegel company data from PFI, December 2016
Ma
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Fig 34 Meat processing transaction multiples (domestic and global)
EV / EBITDA EV / EBIT
Date announced
Date completed
Acquirer Country Target Country EV (A$m) Historical LTM Forward NTM Historical LTM Forward NTM
Meat processing - domestic
Nov-14 Mar-15 JBS SA Brazil Primo Smallgoods Australia 1,450 9.7x na na na na na na na Mar-13 Jun-13 TPG Capital USA Ingham Enterprises Australia 880 4.8x na na na na na na na Jan-11 May-11 Affinity Equity Partners Asia Tegel Foods Australia 466 7.6x na na na na na na na Dec-08 Jul-09 Baiada Australia Bartter Australia 250 5.3x na na na na na na na Mar-08 May-08 JBS Brazil Tasman Group Services Australia 161 9.2x na na na 14.1x na na na Dec-05 Apr-06 Pacific Equity Partners Australia Tegel Foods NZ 230 8.1x 8.1x na na 14.5x 14.5x na na na na ANZ Capital na Tegel Foods (26.7%) NZ - na na na na na na na na Aug-99 na Bartter Australia Steggles Australia 131 na na na na na na na na
Average 7.4x 8.1x na na 14.3x 14.5x na na Median 7.8x 8.1x na na 14.3x 14.5x na na
Meat processing - international Meat processing -
international
Jun-15 Sep-15 JBS SA Brazil Moy Park (Marfrig European poultry)
UK 1,930 11.3x na na na na na na na
Jul-14 Jun-15 Pilgrim's Pride Corp / JBS Foods
USA / Brazil Tyson Foods (Brazil and Mexico poultry)
Brazil / Mexico
611 na na na na na na na na
Jul-14 Aug-14 Tyson Foods, Inc. USA Hillshire Brands Co. USA 9,055 10.5x 10.5x 15.6x 15.6x na na 21.6x 21.6x Nov-13 Jun-14 Sigma Alimentos S.A. de C.V.; Mexico;
China,HK Campofrio Food Group SA Spain 1,674 7.9x 7.9x na na na na na na
May-13 Sep-13 WH Group Limited China, HK Smithfield Foods, Inc. USA 7,366 9.4x 9.4x 7.9x 7.9x 13.7x 13.7x 10.6x 10.6x Sep-10 Nov-10 HKScan Corporation Finland Rose Poultry A/S Denmark 92 na na na na 10.6x na na na Sep-09 Dec-09 JBS Brazil Pilgrim's Pride Corp (64%
stake) USA 3,204 na 8.2x 5.8x na na 26.0x 10.9x na
May-09 Jun-10 BRF Brasil Foods SA Brazil Sadia SA Brazil 5,015 6.8x na na na 11.4x na na na Mar-08 Oct-08 JBS Brazil Smithfield Beef Group USA 605 22.5x na na na 99.1x 20.5x 12.8x na Mar-08 Terminated JBS Brazil National Beef Packing USA 604 6.0x 6.7x na na 9.2x 11.3x na na Sep-06 May-07 Smithfield Foods USA Premium Standard Farms USA 1,072 5.5x 6.9x 7.1x na 9.4x 13.8x 19.4x na Sep-03 Apr-04 Maple Leaf Foods Canada Schneider Corp (Smithfields) Canada 562 9.1x na na na 12.9x na na na Jan-01 Sep-01 Tyson Foods USA IBP Inc USA 8,412 9.5x 9.5x na na 13.5x 13.5x na na
Average 9.9x 8.4x 9.1x 11.7x 22.5x 16.5x 15.1x 16.1x Median 9.2x 8.2x 7.5x 11.7x 12.1x 13.7x 12.8x 16.1x
Source: Mergermarket, press reports, company reports, IRESS, December 2016
Macquarie Wealth Management Inghams Group
21 December 2016 21
DCF Valuation and WACC assumptions
Our DCF valuation provides an equity value of $3.90 per share, which is an implied PER of
15.0x.
Fig 35 DCF valuation and implied ratios
Enterprise valuation 1,900.9 Proforma net debt 418.0 Equity valuation 1,482.9 Value per share $3.90 Implied FY17 ratios PE (x) 15.0 EV/EBIT (x) 12.9 EV/EBITDA (x) 10.0
Source: Macquarie Research, December 2016
Key assumptions to derive our WACC calculation
Risk free rate of 3.25% and an equity risk premium of 5.0%, consistent with our Australian
research team.
We assume an equity beta of 1.2x.
Pre-tax cost of debt of 4.5%. These assumptions drive our base case WACC of 7.83%.
Terminal growth rate (TGR) of 1.75%.
A sensitivity to WACC and TGR assumptions can be found below, as an example, a 50bps
increase in WACC would reduce our valuation by 9%.
Fig 36 Sensitivity of DCF to WACC and TGR
TGR\WACC 6.8% 7.3% 7.83% 8.3% 8.8%
0.8% 9% -2% -12% -19% -26% 1.3% 17% 5% -6% -14% -22%
1.8% 26% 12% 0% -9% -18%
2.3% 38% 21% 7% -3% -13%
2.8% 52% 33% 16% 4% -7%
Source: Macquarie Research, December 2016
Other key DCF assumptions
After assuming prospectus forecasts for FY17F, our discounted cash flow valuation is
based on explicit forecasts through to FY25F. A number of key long-term assumptions are
below.
Long-term average poultry volume growth of 3.5% and long-term average stockfeed
volume growth of 1.9%.
We explicitly model Phase 1 of Project Accelerate with the company targeting savings
of $160-200m. However, we assume that this will be substantially eroded by lower
average selling prices (-1.8% pa average) and cost inflation. We assume around 30%
retention of targeted savings.
We assume that Capital Expenditure will moderate following FY17 ($85m prospectus
forecast spend), but assume an uplift to similar level (adjusted for inflation) every ~4
years. We note that Ingham’s has indicated that the current capacity expansion
program will increase capacity by 16-29%. We estimate that this equates to 5-6 years
of 3-5% market growth.
We assume a working capital to sales ratio of ~11%, which is consistent with the FY16
pro-forma working capital to sales ratio of 11.1%. We note that working capital
includes biological assets, biological assets which are recognised at cost less
accumulated depreciation. They are reclassified to inventory once processed.
Biological assets totalled $115m in FY16.
Our DCF valuation
provides an equity
valuation of $3.90
per share, which is
an implied
PER of 15.0x.
Macquarie Wealth Management Inghams Group
21 December 2016 22
Growth opportunities Ingham’s management sees growth opportunities in:
Capturing underlying market and category growth;
Driving innovation and premiumisation;
Selectively targeting export growth; and
Realising margin expansion opportunities through Project Accelerate
Capturing underlying market and category growth
Chicken consumption in Australia and New Zealand has grown by ~4.1% and ~5.1% per
annum respectively between 1990 and 2015 (OECD). Underlying growth is expected to
continue over the medium term due to population growth, relative affordability and other
consumer trends (e.g. health and convenience). In our view, Ingham’s has a well-invested
asset base and has approved expansion projects to provide further capacity to capture
demand growth.
Well invested asset base
Over the last 10 years, Ingham’s has invested more than $900m to increase capacity and
enhance capability across the network. This included increasing processing capacity and
capability to enable production of value-enhanced, cooked and partially cooked products.
Major investments occurred in primary and further processing with the addition of two
further processing plants (Edinburgh Parks, South Australia and Auckland, New Zealand)
to Ingham’s network and the rebuild of Ingham’s primary processing plant at Somerville
following a fire in 2010. Ingham’s is also expanding capacity in farming and distribution
assets including two hatcheries, four breeder farms and one distribution centre.
Further investment for future growth
Ingham’s has committed capital to increase capacity and improve efficiency in the
feedmilling, breeder and hatchery networks. Investment has been allocated in the following
areas:
Construction of a new feed mill in South Australia
Expansion of the breeder network in South Australia, Queensland and New Zealand;
Expansion of Murraylands hatchery in South Australia; and
Construction of a new hatchery in New Zealand
The figure below summarises the key network capital projects and the capital expenditure
in FY16A and FY17F.
Fig 37 Investment in new capacity*
Network Region Description Estimated completion Status FY16A FY17F
Breeder SA New sheds, shed extensions and equipment upgrades to increase capacity FY17 Commenced Breeder SA Greenfield farms to increase capacity FY17 Commenced Breeder QLD Greenfield farms to increase capacity FY18-19 Board approved Hatchery SA Building and equipment to increase capacity FY17 Commissioned Feedmill SA Greenfield mill to increase capacity and replace third party supply FY18 Tender awarded Breeder NZ Greenfield farms to increase capacity FY17-18 Board approved Hatchery NZ Greenfield hatchery to increase capacity FY17 Board approved
Total $35m $95m
Source: Ingham’s company data, December 2016
Ingham’s capital investment is supported by third parties, including lessors who generally
purchase land and invest in buildings, while Ingham’s invests in capital equipment.
If required, Ingham’s can increase production at its primary and further processing facilities
through extending the length of shifts.
Ingham’s has
committed capital to
increase capacity
and improve
efficiency in the
feedmilling, breeder
and hatchery
networks
Macquarie Wealth Management Inghams Group
21 December 2016 23
As a result of planned investment and the flexibility to move to extended shift patterns in
primary and further processing, Ingham’s management believes that the company has
sufficient capacity to cater for several years of measured growth. Over time,
additional investments may be required to remove bottlenecks and increase efficiency of
processing in some facilities.
Utilisation and available capacity varies by facility.
Fig 38 Ingham’s asset base is currently ~75% utilised across the value chain, with planned capital expansions and latent capacity available for future growth (~25%)
Source: Ingham’s company data, December 2016
Driving innovation and premiumisation
Through its farming, primary processing and further processing facilities, Ingham’s is
focused on product and packaging innovation. Free range, value-enhanced and further
processed products, whose consumption has increased from 50% in FY05 to 62% in FY16
of net poultry sales, provide good examples of how consumer trends drive changes in
consumption patterns.
Consumer trends have driven growth in higher-priced chicken products. For example:
Consumers’ desire for foods that improve their health and wellbeing underpins the
development of ‘free-from’ products, such as gluten-free;
Demand for convenience drives packaging innovation and development of ‘ready-to-
cook’ products; and
Increased interest in animal welfare and food provenance underpins innovation in
animal welfare standards as well as opportunities to develop premium products such
as Waitoa range of free range products.
Ingham’s has invested in building capability across consumer insights, marketing, category
management and account management to better position itself to continue to be a leader
in product innovation and capture the benefits of premiumisation of chicken products.
Selectively targeting export growth
Ingham’s management believes it is well placed to capture targeted export opportunities
should Asian markets prove attractive for Australia and New Zealand poultry producers, as
it can:
Leverage its brands (“Ingham’s” and “Waitoa”) and reputation;
Export from the lowest cost country (of Australia and New Zealand);
Reduce any biosecurity risk by spreading supply of a full range of primary processed
and further processed products across two geographies; and
Leverage Australia and New Zealand’s global reputation for food safety and quality.
77%
98%
81%
96%
82%
69%
23%
2%
19%
4%
18%
31%
24%
24%
18%
16%
29%
25%
0% 20% 40% 60% 80% 100% 120% 140%
Feed
Breeder
Hatchery
Broiler
Primary plant
Further processing
Current utilisation Latent capacity Planned expansion Extended shifts
Ingham’s
management
believes that the
company has
sufficient capacity
to cater for several
years of measured
growth.
Macquarie Wealth Management Inghams Group
21 December 2016 24
Realising margin expansion opportunities
Following a review in 2015, management identified a number of opportunities to improve
efficiency in the business via ‘Project Accelerate’.
Project Accelerate comprises a number of initiatives to improve production efficiency
across the integrated operations, including investment in automation. Management is
targeting total gross benefits from Project Accelerate of $160 million - $200 million
over 5 years commencing in FY16.
Ingham’s commenced Project Accelerate in May 2015. Some benefits contributed to FY16
earnings. Approximately 50% of the benefits are expected to be realised post FY17. The
benefits from this program are designed to allow Ingham’s to remain competitive,
mitigate inflation in costs and contribute to profit growth.
Ingham’s is currently focussed on the following initiatives.
Investment in automation;
Labour and productivity improvements;
Procurement savings;
Network rationalisation;
Warehousing and logistics savings; and
Improvement in the turkey and smallgoods business.
Automation
Ingham’s identified automation opportunities with capital payback of less than two years.
These opportunities primarily relate to the purchase of specialised equipment to replace
manual handling and processing, thereby increasing efficiency and reducing cost.
Implementation of the first phase of automation commenced in October 2015 and was
completed in FY16. Over $12 million of capital was invested in automation during this
period, driven by investment in automated deboning equipment in primary processing
plants.
Fig 39 Automation case studies
Breast deboners Cutlet deboners Breast cap deboners Leg deboner
Installed in FY16 3 4 2 1 Payback period (mths) 15 3 9 9
Source: Ingham’s company data, December 2016
Labour productivity
The company has identified opportunities to optimise labour productivity. The primary
opportunity identified was to improve labour planning (i.e. matching labour supply and
demand) by establishing a workforce planning team and implementing purpose-built labour
management tools and processes.
These labour productivity initiatives have begun to deliver benefits to Ingham’s primary
processing efficiency. Since March 2016, Ingham’s two largest facilities, Murarrie and
Bolivar, have delivered efficiency gains due to productivity initiatives. Management expects
further efficiency gains to be delivered through FY17 and beyond.
In July 2016, Ingham’s renegotiated the EBA associated with the Bolivar facility, extending
the term of the agreement through to December 2019. The new agreement provides
greater flexibility and allows Ingham’s to continue implementing its labour optimisation
initiatives on site. Ingham’s expects that similar flexibility will be achieved at other sites
through FY17.
Management is
targeting total gross
benefits from
Project Accelerate
of $160 million -
$200 million over
5 years
commencing in
FY16.
Macquarie Wealth Management Inghams Group
21 December 2016 25
Procurement
Historically, Ingham’s operated without any centralised general (non-feed) procurement
function and was reliant on individuals on site or at the head office to negotiate agreements
with over 6,000 suppliers across Australia and New Zealand, covering an addressable
spend of ~A$800m per annum. As part of Project Accelerate, Ingham’s has implemented a
centralised procurement function. Implementation of the first round of procurement
initiatives was completed in FY16. A second round of initiatives is under way.
Fig 40 Procurement case studies
From To
Labels
23 suppliers 2 suppliers
Personal protective equipment
12 suppliers 2 suppliers
Source: Ingham’s company data, December 2016
Network Rationalisation
During 2015, an end-to-end network strategy was developed. This was informed by
Ingham’s decision to focus production at major plants in South Australia and Queensland
to take advantage of lower production costs and investments in automation.
The network strategy identified the need for investment of capacity in the feedmill, breeder
and hatchery networks and also identified rationalisation opportunities. In December 2015,
a production line was closed at the Cleveland further processing plant in QLD, resulting in
improved utilisation elsewhere in the further processing network.
The company also closed the Cardiff processing plant in NSW in August 2016. As a result
of this closure, processing volumes were increased through more automated and efficient
facilities in South Australia and Queensland, resulting in the following benefits:
Increased efficiencies in the broiler network;
Reduced processing costs;
Overhead cost savings; and
Reduction in overall maintenance costs.
The company will continue to assess the efficiency and strategic importance of all its
facilities to optimise its network and balance capital efficiency, quality and agricultural risk.
Warehousing and logistics
Warehousing and logistics covers the storing and transport of all products after the primary
processing stage of production. The company has identified supply chain savings in the
following areas:
Linehaul costs, including renegotiation with key suppliers across the network;
Transport efficiencies, including increasing pallet heights and improving route
scheduling; and
Warehouse labour management.
Macquarie Wealth Management Inghams Group
21 December 2016 26
Turkey and smallgoods
Ingham’s turkey and smallgoods operations have had a number of challenges in recent
years and recorded a loss in FY15. The key issue related to poor demand planning and
excess capacity in the farming and breeding operations, leading to oversupply of product
that needed to be frozen and sold down at negative margin.
The turkey and smallgoods operations delivered a positive EBITDA result in FY16.
Management expects this to further improve in FY17. Major restructuring projects are now
complete. These involved:
Improving supply and demand planning;
Reducing capacity, excess production and resulting in distressed sales; and
Improving operational efficiency.
Macquarie Wealth Management Inghams Group
21 December 2016 27
Risks Inability to pass on feed costs
Feed costs represent the largest component of Ingham’s cost of goods sold. The prices
and availability of these raw ingredients are influenced by Australian and global demand
and supply factors such as crop production, weather conditions, disease outbreak which
are generally outside of Ingham’s control. There is risk of a lack of recovery in the event of
volatile movements in feed costs that would compress margins.
Ingham’s has a good track record in tightly managing feed costs that have ranged from 23-
25% of total poultry revenues from FY14-FY16. Additionally, Ingham’s has been successful
in recovering feed costs and a number of Ingham’s major customer contracts have
provisions that allow for feed cost rise and fall recovery.
Retail concentration
Retail and QSRs account for 59% and 14% of Australian poultry industry sales,
respectively. Ingham’s Top 5 customers represent 55-60% of sales (FY16a). This
represents a relatively concentrated customer base. There is a risk of volume losses or
margin squeeze as contracts come up for renewal in what is a competitive industry which
could lead to a significant reduction in demand for Ingham’s poultry.
Ingham’s is the largest chicken supplier in Australia and second-largest in New Zealand
and has longstanding relationships with all of its key customers. It would be difficult for
major retail customer to quickly replace the large volume of chicken supplied by Ingham’s.
Risk that Ingham’s cost saves are competed away over time
Our research suggests Coles and Woolworths continue to impose significant pressure on
the consumer supply chain. Poultry is not immune from this but the risk is mitigated by the
importance of poultry in driving volume growth in the overall “fresh” category which in turn
is a broader volume driver. A lack of integrated producers, Ingham’s superior scale and
lack of imports (regulatory driven) are also mitigating factors. In our view, realisation of
ongoing cost savings represents an earnings buffer against further potential price erosion.
Agricultural and disease risk
Australia and New Zealand have strict biosecurity restrictions in place designed to prevent
the introduction of exotic avian diseases into these countries and to manage any outbreak
of exotic avian disease. However, if an outbreak of avian influenza or another avian
disease occurred in Ingham’s flock or in areas where Ingham’s operates, as a result of the
regulatory restrictions designed to manage the outbreak, Ingham’s may be required to
destroy poultry or be restricted from transporting poultry between facilities or products to
customers. If a disease outbreak occurred it would significantly impact Ingham’s production
capacity, supply chain, and operations.
We note there have been limited outbreaks of serious diseases in Australia. The risk is
mitigated by strict quarantine procedures and import restrictions.
Supply chain interruption
Ingham’s business is highly integrated and small changes or variances in upstream areas
of the business such as breeder eggs, hatcheries and broiler farms can have a compound
effect down the chain. A number of different parts of Ingham’s supply chain are provided
by third parties which exposes Ingham’s to potential disruptions which could be outside of
its control.
Ingham’s has a diversified business with operations across NSW, VIC, QLD, SA, WA, TAS
and NZ. The geographic location of the various facilities provides redundancy if there are
any issues at a particular breeding farm, broiler farm or processing plant.
Ingham’s has been
successful in
recovering feed
costs and a number
of major customer
contracts have feed
cost rise and fall
recovery
Realisation of
ongoing cost
savings represents
an earnings buffer
against further
potential price
erosion
Macquarie Wealth Management Inghams Group
21 December 2016 28
Changes to import restrictions
Australia and New Zealand operate strict quarantine regimes that restrict the importation of
most types of poultry meat. Any significant change to import conditions that allow further
access for imported poultry meat could have an impact on Ingham’s markets and revenue.
Australia recently announced a relaxation of poultry importation law for New Zealand
produce, provided certain conditions are met. While we expect little change in fresh
volumes the impact in other categories and implications for market share remain uncertain.
Competition risks
In our view, the Australian and New Zealand poultry industries are competitive markets.
Ingham’s has a large established competitor in Australia of similar size (Baiada). Baiada is
a private company hence there is less visibility into company operations and less pressure
to deliver short term results. Additionally, there are several smaller poultry producers of
sufficient scale to impact regional pricing at certain times. In New Zealand, Ingham’s is the
second-largest poultry producer and Tegel is its main competitor which listed on the NZX
in 2016.
Food Safety Risk
Poultry products are susceptible to contamination or damage throughout the supply chain.
If Ingham’s or a competitor’s products were to become unsafe or were perceived to be
unsafe for any reason this could result in reduced demand for Ingham’s products, which
could have a material adverse effect on Ingham’s financial and operating performance.
Material reduction in supply of parent stock
The volume of chicken and other poultry products produced by Ingham’s depends on the
volume and quality of Ingham’s parent stock which can be impacted by a number of factors
including a failure of a parent stock supplier, poor animal husbandry practices, poor feed
quality or an outbreak of disease. A significant reduction in parent stock would adversely
affect Ingham’s operating performance and profit.
Ingham’s has a diversified base of hatcheries and broiler farms located around Australia
which minimises the impact of disease or other potentially localised issues, in our view. In
2016, Ingham’s renewed its Australian supply contract with Aviagen for the next eight
years. It also has an uncontracted agreement with Cobb-Vantress, its alternate supplier.
Ingham’s suffers reputation or brand damage
Ingham’s reputation with its customers and consumers generally is an important asset of
the business. Ingham’s also sells products under different brands, including the “Ingham’s”
and “Waitoa” brands, which are of significant value to the business.
A material adverse impact to the reputation of Ingham’s or its brands could adversely affect
customer relationships resulting in loss of business and market share and have a material
adverse effect on Ingham’s financial and operating performance.
Material increase in labour costs
The majority of Ingham’s workforce is covered by Enterprise Workplace Agreements which
periodically require renegotiation. The six largest agreements cover around 60% of
Ingham’s employees. A breakdown of relations with the workforce and labour unions could
impact employment conditions and increase labour costs.
Significant changes in consumer trends, demands and preferences
The poultry industry is subject to changing consumer trends, demands and preferences,
including as a result of increased focus on animal welfare, changing tastes and dietary
habits of consumers and general economic conditions. Responding to new market trends
could require significant investment and Ingham’s devotes significant resources to product
development. A failure to effectively identify trends and develop suitable products could
result in lower sales volumes and discounted prices.
We note Ingham’s has been successful in recognising and responding to consumer trends,
with a significant shift occurring in the product mix between 2005 and 2016.
The Australian and
New Zealand poultry
industries are
competitive
markets.
Macquarie Wealth Management Inghams Group
21 December 2016 29
Benefits from transformation projects may be delayed or less than expected
Management has estimated the quantum and timing of Project Accelerate benefits as well
as the capital investment required. Cost overruns, a failure to complete the transformation
program or delays may impact implementation of Project Accelerate and actual cost
savings and efficiencies achieved may differ from forecasts.
Macquarie Wealth Management Inghams Group
21 December 2016 30
Financials Profit and loss account
Set out below are Macquarie forecast consolidated P&L for Ingham’s.
Fig 41 Profit & Loss – Macquarie Estimates
Profit & Loss 2016A 2017E 2018E 2019E
Revenue $m 2308.7 2375.0 2422.0 2467.6 Growth - 2.9% 2.0% 1.9% EBITDA $m 167.5 190.1 208.6 219.5 Depreciation $m 34.4 42.2 50.0 53.6 Amort (non-cash backed) $m 0.0 0.0 0.0 0.0 EBIT $m 133.1 147.9 158.6 165.9 Net interest expense $m 18.0 15.3 14.8 14.5 Pre-Tax Profit $m 115.1 132.6 143.8 151.3 Tax Expense $m 32.0 33.7 37.4 39.3 Net Profit $m 83.1 98.9 106.4 112.0 Outside equity interests $m 0.0 0.0 0.0 0.0 Net Abnormals/Extra. $m 0.0 -53.6 0.0 0.0 Reported Earnings $m 83.1 45.3 106.4 112.0 Adjusted Earnings $m 83.1 98.9 106.4 112.0 EPS (adj/diluted) c 21.9 26.0 28.0 29.5 EPS growth % - 19.1 7.6 5.2
Source: Company data, Macquarie Research, December 2016
Set out below are the pro-forma consolidated P&L and operating metrics for Ingham’s.
Fig 42 Summary P&L and Prospectus Forecast
Pro Forma Historical Proforma Forecast
$ millions FY14 FY15 FY16 FY17
Revenue 2,230.5 2,271.9 2,308.7 2,375.0 Cost of sales -1,851.2 -1,920.8 -1,886.3 -1,916.6 Gross profit 379.3 351.1 422.4 458.4 Other income 0.3 7 3.7 - Distribution expense -139.9 -139.9 -135.7 -144.2 Sales, general and administration expense
-98 -104.1 -123.4 -124.6
Share of net profit of JV 0.4 0.4 0.5 0.5 EBITDA 142.1 114.5 167.5 190.1 Depreciation and amortisation -40.2 -33.3 -34.4 -42.2 EBIT 101.9 81.2 133.1 147.9 Net finance costs -19.9 -19.2 -18 -15.4 Profit before tax 82 62 115.1 132.5 Income tax expense -25 -10.3 -32 -33.7 NPAT 57 51.7 83.1 98.8 Key operating metrics Poultry products volume (kt) 432.7 425.2 444.2 478.3 Poultry products volume growth % on pcp
-1.7% 4.50% 7.7%
Stockfeed volume (kt) 545.6 580.4 561.9 577.6 Stockfeed volume growth % on pcp 6.4% -3.2% 2.8% Key financial metrics Revenue growth % on pcp 1.9% 1.6% 2.9% Gross profit growth % on pcp -7.4% 20.3% 8.5% Gross profit margin 17.0% 15.5% 18.3% 19.3% EBITDA growth % on pcp -19.4% 46.3% 13.5% EBITDA margin 6.4% 5.0% 7.3% 8.0% EBIT growth % on pcp -20.3% 63.9% 11.1% EBIT margin 4.6% 3.6% 5.8% 6.2%
Source: Ingham’s company data, December 2016.
Macquarie Wealth Management Inghams Group
21 December 2016 31
Ingham’s has delivered modest revenue growth from F14-FY16 with solid EBITDA growth
driven by margin expansion. Margins improved into FY16 and are forecast to expand
further into FY17 driven by early benefits arising from Project Accelerate.
We expect given relatively steady consumer demand patterns throughout the year (with
the exception of the Turkey business) that Ingham’s has minimal revenue seasonality. The
accumulation of Project Accelerate initiatives throughout the year and timing of short
weeks is forecast by management to lead to a 2H weighting to earnings. 2H17e NPAT is
forecast by management to represent 52-55% of FY17 forecasts.
Revenues
Revenues are reported net of rebates and trade allowances. As discussed elsewhere the
key drivers of Ingham’s revenues are:
Consumer demand and preferences;
Key customer agreements and contracts; and,
Global grain commodity prices.
Feed costs represent a significant component of production costs and are a key driver of
ultimate selling price for both poultry products and stockfeed. As can be seen in the chart
below, Ingham’s has a good track record of managing feed cost volatility. Changes in feed
costs both up and down have typically been passed on to customers. Feed costs have
ranged from 23-25% of total poultry revenues from FY14-FY16.
Fig 43 Ingham’s long-term trend in feed costs and average selling prices
Source: Ingham’s company data, December 2016
A number of Ingham’s major contracts have provisions that allow for pass-through of
variations in feed costs. Ingham’s also uses forward contracts to lock in feed prices up to
nine months in advance which reduces the impact of short-term price movements and
provides time to implement pricing adjustments.
Realisation of
Project Accelerate
savings throughout
the year and timing
of short weeks is
forecast by
management to lead
to a 2H weighting to
earnings
Macquarie Wealth Management Inghams Group
21 December 2016 32
Fig 44 Wheat well below long-term average levels, while Soy is broadly in line
Source: FactSet, December 2016 Source: FactSet, December 2016
Given the pass through nature of feed costs and their influence on revenues, we believe
volume growth and gross margin performance are arguably better indicators of
business performance. After some operational disruptions in FY15, Ingham’s delivered
4.5% growth in poultry product volumes in FY16 and forecasts this to accelerate to 7.7% in
FY17.
This above long-term average industry volume growth reflects strong growth in the retail
channel due to changes in pricing strategies adopted by the major retailers for the key
fresh chicken breast and BBQ bird categories.
Operating Expenses
Key categories include:
Cost of Goods Sold (COGS);
Distribution expense;
Selling, General and Administration; and,
Depreciation and amortisation
COGS includes feed costs, direct labour costs, husbandry fees, facilities costs and product
inputs and consumables.
Fig 45 FY16 cost base as a percent of sales
Source: Macquarie Research, December 2016
0
5
10
15
20
08-Dec-06 08-Dec-08 08-Dec-10 08-Dec-12 08-Dec-14 08-Dec-16
Soy (US$/bu) Wheat (US$/bu)
US$/bu
0
5
10
15
20
08-Dec-06 08-Dec-08 08-Dec-10 08-Dec-12 08-Dec-14 08-Dec-16
Soy (A$/bu) Wheat (A$/bu)
A$/bu
Feed Costs 27.8%
Labour costs in COGS
15.5%
Husbandry fees, Facility Costs,
Product inputs and consumables
38.4%
Distribution expense
5.9%
SGA5.3%
D & A1.5%
EBIT5.8%
COGS
A number of
Ingham’s major
contracts have
provisions which
allow for pass
through of
variations in feed
costs
Macquarie Wealth Management Inghams Group
21 December 2016 33
Feed costs are the largest component of COGS. They are variable in nature based on
volumes produced and sold. Over the longer term they are influenced by changes in the
feed conversion ratio. As discussed previously, while cost of feed is largely driven by
changes in global feed prices these have historically been largely offset as a percent of
sales by changes in market pricing. Feed costs including cost of feed sold externally
represented 34% of FY16 pro forma COGS.
Labour costs are incurred predominately during primary and further processing. They have
reduced per KG of product produced from FY14-FY16 with investment in automation and
improvements made to increase workforce flexibility and efficiency. Labour costs
represented approximately 19% of pro forma COGS in FY16.
Husbandry fees are paid to contract growers. These costs are variable in nature based on
the number of birds produced. They are impacted by changes in husbandry and farming
practices such as the number of pick-ups, the density of birds and litter control.
Facilities costs include rent, utilities, repairs and cleaning and waste management costs.
There was a step up in facilities cost in FY15 following the sale and leaseback program.
They are predominately fixed in nature although cleaning and waste management are
more variable.
Product inputs and consumables include packaging and labelling costs, other ingredients
and production consumables such as cooking oils. They are variable in nature driven by
production volumes
Distribution expense includes cost of moving products from processing facilities, to
distribution centres and ultimately the end customer. They include freight, labour and
facilities costs. Facility costs include both company-operated sites and third-party logistics
providers.
SGA represents the corporate overhead of the business. They have increased from FY14-
16 with investment in staff capability and IT infrastructure.
Depreciation is charged on a straight-line basis. This is forecast to increase into FY17
given the capital investment program.
Share of net profit of JV includes Ingham’s 50% share of AFB Internationals.
While cost of feed is
largely driven by
changes in global
feed prices these
have historically
been largely offset
as a percent of
sales by changes in
market pricing
New Zealand
operations are
operating at
significantly higher
margins than
Australia
Fig 1 Geographic Segments – Macquarie Estimates
Pro Forma Historical Macquarie Forecast Growth rates
$ millions FY14 FY15 FY16 FY17 FY18 FY19 FY16-FY17 FY17-FY18 FY18-FY19 Revenue Australia 1,892.3 1,914.9 1,955.2 2,003.3 2,043.4 2,084.2 2.5% 2.0% 2.0% New Zealand 338.2 357.0 353.5 371.7 378.6 383.4 5.1% 1.9% 1.3% Total revenue 2,230.5 2,271.9 2,308.7 2,375.0 2,422.0 2,467.6 2.9% 2.0% 1.9% EBITDA Australia 112.4 80.6 132.2 153.1 169.6 179.2 15.8% 10.8% 5.7% New Zealand 29.7 33.9 35.3 37.0 39.0 40.3 4.8% 5.4% 3.2% Total EBITDA 142.1 114.5 167.5 190.1 208.6 219.5 13.5% 9.7% 5.2% EBITDA margin Australia 5.9% 4.2% 6.8% 7.6% 8.3% 8.6% New Zealand 8.8% 9.5% 10.0% 10.0% 10.3% 10.5% Total EBITDA margin 6.4% 5.0% 7.3% 8.0% 8.6% 8.9% EBIT Australia 81.8 52.8 103.5 117.6 127.6 134.2 13.60% 96.00% 13.60% New Zealand 20.1 28.4 29.6 30.3 31.0 31.7 2.40% 4.20% 2.40% Total EBIT 101.9 81.2 133.1 147.9 158.6 165.9 11.10% 63.90% 11.10% EBIT margin Australia 4.3% 2.8% 5.3% 5.9% 6.2% 6.4% New Zealand 5.9% 8.0% 8.4% 8.2% 8.2% 8.3% Total EBIT margin 4.6% 3.6% 5.8% 6.2% 6.5% 6.7%
Source: Macquarie Research, December 2016
New Zealand
Macquarie Wealth Management Inghams Group
21 December 2016 34
Segment financials
Segments are provided on a geographic basis. Both segments include contribution from
poultry products and stockfeed. Given no corporate line is provided we expect the New
Zealand operations are charged a royalty to reflect corporate overhead and to take
account of intellectual property that sits in the Australian operations.
Fig 47 Geographic Segments – Macquarie Forecasts
Proforma Historical Macquarie Forecast Growth rates
$ millions FY14(a) FY15(a) FY16(a) FY17(e) FY18(e) FY19(e) FY16-17 FY17-18 FY18-19 Revenue Australia 1,892.3 1,914.9 1,955.2 2,003.3 2,043.4 2,084.2 2.5% 2.0% 2.0% New Zealand 338.2 357.0 353.5 371.7 378.6 383.4 5.1% 1.9% 1.3% Total revenue 2230.5 2271.9 2308.7 2375.0 2422.0 2467.6 2.9% 2.0% 1.9% EBITDA Australia 112.4 80.6 132.2 153.1 169.6 179.2 15.8% 10.8% 5.7% New Zealand 29.7 33.9 35.3 37.0 39.0 40.3 4.8% 5.4% 3.2% Total EBITDA 142.1 114.5 167.5 190.1 208.6 219.5 13.5% 9.7% 5.2% EBITDA margin Australia 5.9% 4.2% 6.8% 7.6% 8.3% 8.6% New Zealand 8.8% 9.5% 10.0% 10.0% 10.3% 10.5% Total EBITDA margin 6.3% 5.0% 7.1% 7.8% 8.5% 8.7% EBIT Australia 81.8 52.8 103.5 117.6 127.6 134.2 13.6% 8.5% 5.1% New Zealand 20.1 28.4 29.6 30.3 31.0 31.7 2.4% 2.3% 2.2% Total EBIT 101.9 81.2 133.1 147.9 158.6 165.9 11.1% 7.2% 4.6% EBIT margin Australia 4.3% 2.8% 5.3% 5.9% 6.2% 6.4% New Zealand 5.9% 8.0% 8.4% 8.2% 8.2% 8.3% Total EBIT margin 4.5% 3.5% 5.6% 6.1% 6.4% 6.6%
Source: Macquarie Research, Ingham’s company data, December 2016
Fig 48 Geographic Segments – Proforma forecast
Pro Forma Historical Pro Forma Forecast
Growth rates
$ millions FY14 FY15 FY16 FY17 FY14-15 FY15-16 FY16-17
Revenue
Australia 1,892.3 1,914.9 1,955.2 2,003.3 1.2% 2.1% 2.5% New Zealand 338.2 357.0 353.5 371.7 5.6% -1.0% 5.1% Total revenue 2,230.5 2,271.9 2,308.7 2,375.0 1.9% 1.6% 2.9% EBITDA Australia 112.4 80.6 132.2 153.1 -28.3% 64.0% 15.8% New Zealand 29.7 33.9 35.3 37.0 14.1% 4.1% 4.8% Total EBITDA 142.1 114.5 167.5 190.1 -19.4% 46.3% 13.5% EBITDA margin Australia 5.9% 4.2% 6.8% 7.6% New Zealand 8.8% 9.5% 10.0% 10.0% Total EBITDA margin 6.4% 5.0% 7.3% 8.0% EBIT Australia 81.8 52.8 103.5 117.6 -35.5% 96.0% 13.6% New Zealand 20.1 28.4 29.6 30.3 41.3% 4.2% 2.4% Total EBIT 101.9 81.2 133.1 147.9 -20.3% 63.9% 11.1% EBIT margin Australia 4.3% 2.8% 5.3% 5.9% New Zealand 5.9% 8.0% 8.4% 8.2% Total EBIT margin 4.6% 3.6% 5.8% 6.2%
Source: Ingham’s Company data, December 2016.
Macquarie Wealth Management Inghams Group
21 December 2016 35
As can be seen in the table above, the New Zealand operations are operating at
significantly higher margins than Australia. We believe this reflects the relatively more
favourable competitive dynamics in the NZ market as well as NZ’s lower labour and rental
costs. Feed costs are generally higher in New Zealand however FCRs are also better.
Fig 49 Revenue breakdown – Proforma forecasts
Pro Forma Historical Pro Forma Forecast
Growth rates
$ millions FY14 FY15 FY16 FY17 FY14-15 FY15-16 FY16-17
Revenue
Poultry products 1,939.8 1,957.6 2,013.7 2,081.2 0.9% 2.9% 3.4% Stockfeed 288.4 312.3 293.1 293.5 8.3% -6.1% 0.1% Sales revenue 2,228.2 2,269.9 2,306.8 2,374.7 1.9% 1.6% 2.9% Other revenue 2.3 2.0 1.9 0.3 -13.0% -5.0% -84.2% Total revenue 2,230.5 2,271.9 2,308.7 2,375.0 1.9% 1.6% 2.9%
Source: Ingham’s company data, December 2016.
The table above provides a breakdown of Ingham’s revenue by product. Stockfeed
comprises only external sales. Margins on external stockfeed revenues are not provided.
Based on industry peers we expect Stockfeed margins would be below Poultry margins.
Within Stockfeed we expect the branded and smaller portioned horse feed to be highest
margin and dairy feed to be the most volatile given less predictable demand patterns due
to milk price and weather influences.
FY15 compared to FY14
Fig 50 FY15 Pro Forma EBIT fell 20% compared to FY14
Source: Ingham’s company data, December 2016
FY15 results were impacted by a number of internal and external factors that impacted
poultry product volumes and severely impacted gross margins. Key factors impacting FY15
results were:
Genetic supply issues resulting in short supply of breeder stock and quality eggs;
Operational planning issues resulting in processing inefficiencies;
Loss of Turkey volume and poor demand planning; and,
Increased costs associated with the need to upgrade grower facilities to meet RSPCA
standards.
101.9
81.2
17.8
23.9
6.4 6.9
69.6
6.1
0
20
40
60
80
100
120
140
160
FY14 EBIT
Poultry Revenue
Feed Revenue COGS Other Rev/Inc
SG&A D&A FY15 EBIT
$m
FY15 was adversely
impacted by a
number of internal
and external factors
that impacted
poultry product
volumes and
severely impacted
gross margins
Macquarie Wealth Management Inghams Group
21 December 2016 36
Fig 51 Lower poultry volumes and gross margins the key drivers of the earnings decline
Pro Forma Historical
FY14 FY15 Change %
Key operating metrics Poultry volume (kt) 432.7 425.2 -7.5 -1.7% Stockfeed volume (kt) 545.6 580.4 34.8 6.4% Key financial metrics Gross profit margin 17.0% 15.5% -1.5% n/a EBITDA margin 6.4% 5.0% -1.4% n/a EBIT margin 4.6% 3.6% -1.0% n/a
Source: Ingham’s company data, December 2016
Stockfeed revenues increased 8.3% with increases in both volumes and feed prices.
Volume growth reflected growth in pig feed sales in WA and poultry and dairy feed
volumes in NZ.
Genetic supply issues impacted the Australian poultry operations in particular, which
together with loss of turkey volumes resulted in poultry volumes declining 1.7%.
During FY15 Ingham’s experienced a reduction in hatchability rates causing an increase in
mortality rates and thus costs per bird. The problems arose from genetics quality and
logistics issues which led to short supply of breeder stock and resulted in Ingham’s
needing to purchase eggs from third parties, set lower quality eggs and extend the life of
breeder stock.
In May 2016 Ingham’s established a new genetics supply agreement which has a
framework for testing and quality programs and offers Ingham’s preferential supply.
Loss of a customer and operational planning issues resulted in excess capacity in Turkey
breeding and farming operations which impacted Turkey volumes and margins.
Operational planning issues arising from a commitment to supply material incremental
volumes to a customer resulted in Ingham’s having to take birds from broiler farms earlier
than normal. This had a flow-on effect impacting bird availability in future months impacting
supply volumes and processing costs. Ingham’s have subsequently moved from a state-
based to a national operating model and introduced new national planning processes to
avoid a repeat of these types of issues.
Offsetting the lower volumes, average poultry prices increased as a result of mix shift
towards value enhanced and further products, a key customer adopting RSPCA welfare
standards and higher feed costs.
The adoption of RSPCA welfare standards by a major customer resulted in Ingham’s
increasing investment in facilities and incurring higher husbandry costs. These increased
costs were effectively passed through in the form of higher prices.
Other income included profit on sale of property.
SGA increased investment in capability of corporate functions.
Depreciation and amortisation reduced in FY15 following asset sales and impairments
booked in FY14.
Resolution of FY15 operational issues and early benefits of Project Accelerate drove a recovery in poultry volumes and strong rebound in FY16 gross and EBIT margins. Resolution of FY15 operational issues and early benefits of Project Accelerate drove a recovery in poultry volumes and strong rebound in FY16 gross and EBIT margins.
Macquarie Wealth Management Inghams Group
21 December 2016 37
Fig 52 FY16 EBIT bounced back, up 64% on FY15
Source: Ingham’s company data, Other Income also includes other revenue, December 2016
The resolution of operational issues that impacted FY15 volumes and margins, together
with early benefits of Project Accelerate drove a recovery in poultry volumes and strong
rebound in FY16 gross and EBIT margins.
Fig 53 Strong improvement in poultry volumes and margins
Pro Forma Historical
FY15 FY16 Change %
Key operating metrics Poultry volume (kt) 425.2 444.2 19.0 4.5% Stockfeed volume (kt) 580.4 561.9 -18.5 -3.2% Key financial metrics Gross profit margin 15.5% 18.3% 2.8% n/a EBITDA margin 5.0% 7.3% 2.3% n/a EBIT margin 3.6% 5.8% 2.2% n/a
Source: Ingham’s company data, December 2016
Stockfeed revenues declined 6.1% driven by a reduction in both volumes and prices.
Lower dairy prices impacted demand from New Zealand dairy producers. Export volumes
also decreased.
Poultry product revenues increased 2.9%. Changes in retail pricing drove increased
demand for BBQ birds and chicken breast and thus volumes in the retail channel but also
resulted in lower average pricing. The increase in bird numbers to meet BBQ bird volumes
also resulted in increased surplus birds that did not meet the targeted weight range. These
birds (too large or small for the BBQ offer) were sold into the wholesale channel, creating a
surplus and depressing prices.
Management expect prices in the wholesale market to improve by end of FY17 as
producers and end users adjust their production and purchasing patterns to account for the
increased volume associated with the low price point BBQ birds.
Operational improvements associated with Project Accelerate initiatives drove a $6.6m
reduction in COGS in the Turkey business as well as other improvements in labour
efficiency, procurement and supply chain savings that positively impacted gross margins.
Distribution costs fell by $4.2m as a result of freight cost reductions, reduction of
distribution centre capacity and outside storage costs.
SGA increased with investment in capability, IT infrastructure and marketing costs.
81.2
133.156.1
34.5 4.2
0.119.2
3.4 19.3
1.1
0
20
40
60
80
100
120
140
160
180
FY15 EBIT
Poultry Revenue
Feed Revenue
COGS Other Rev/Inc
Distribution SG&A JV D&A FY16 EBIT
$m
Macquarie Wealth Management Inghams Group
21 December 2016 38
Fig 54 FY17 EBIT forecast to increase 11% on FY16
Source: Macquarie Research, December 2016.
Key assumptions underpinning FY17 forecasts are:
No new customer wins beyond those in place at end August;
Any contracts expiring assumed to be renewed based on the particular circumstances
of each customer. We note Ingham’s has its second-largest QSR customer contract up
for renewal in FY17;
Sales volumes forecast for each customer in each channel based upon current
volumes. These include an annualisation of the pickup in 2H16 volumes in the retail
channel associated in particular with the success of retailer pricing strategies in breast
meat and BBQ bird categories;
A gradual recovery in wholesale pricing from end-1Q17 back towards levels
experienced before 4Q16;
Oversupply of birds continuing to depress prices in the NZ market;
No significant changes to Stockfeed customer base, volumes in line with pcp and
continued subdued pricing in the NZ dairy feed market;
COGS % reductions reflecting Project Accelerate initiatives. FY17 is the second year
of the project Accelerate Transformation program. This program commenced in May
and is targeting $160-$200m of savings over five years. Approximately half of these
benefits are expected to be realised beyond the forecast period;
Higher depreciation and amortisation driven by an increase in capacity growth capex
and profit improvement capex;
25% effective tax rate reflecting weighting of its Australian and New Zealand effective
rates. The Australian effective rate is less than 30% due to certain items not being
assessable for Australian income tax purposes. Based on other Trans Tasman entities
we expect these largely relate to the royalty charged to the NZ operations; and,
Fx rate of 1AUD=1.045 NZD. This would result in NZ revenues receiving a $15.3m
translation benefit reflecting a stronger NZD.
133.1147.9
67.5 0.4 30.3
5.38.5
1.2 7.8
0
50
100
150
200
250
FY16 EBIT
Poultry Revenue
Feed Revenue
COGS OtherRev/Inc
Distribution SG&A D&A FY17 EBIT
$m
Macquarie Wealth Management Inghams Group
21 December 2016 39
Fig 55 Strong Poultry volume growth forecast to continue in FY17
Pro Forma
Historical Forecast FY16 FY17 Change %
52 weeks 52 weeks
Key operating metrics Poultry volume (kt) 444.2 478.3 34.1 7.7% Stockfeed volume (kt) 561.9 577.6 15.7 2.8% Key financial metrics Gross profit margin 18.3% 19.3% 1.0% n/a EBITDA margin 7.3% 8.0% 0.7% n/a EBIT margin 5.8% 6.2% 0.4% n/a
Source: Macquarie Research, December 2016.
Poultry products revenues are forecast by management to increase by 3.4%. This is
underpinned by a 7.7% increase in volumes. The volume growth forecast reflects the full
year impact of retailer pricing strategies implemented in 2H16, increase in other product
volumes (unrendered) offsetting lower volumes through the wholesale channel.
The higher volume growth is partially offset by lower pricing due to mix, NZ market supply
conditions and lower average prices in the wholesale channel despite the recovery
forecast throughout the year.
COGS are forecast by management to reduce by 100bp. This includes identified and
planned procurement savings and a reduction in labour costs with the annualisation of
FY16 project Accelerate initiatives and further benefits from FY17 programs. These offset
EBA changes, CPI and contracted husbandry price increases.
Distribution expense is forecast to increase with higher production volumes and increases
in labour and other fixed costs.
SGA is forecast to increase with higher wage costs, increased IT expenditure including a
technology refresh program across its core technologies and increased marketing. Partially
offset by reduction in consultancy fees.
Margin Analysis
The table below compares Ingham’s last actual and FY17 forecast EBITDA margins and
return on assets to Tegel and International poultry peers.
Fig 56 EBITDA margins of peer group
Source: Macquarie Research, December 2016
Margins and are impacted by product mix, differences in market structures, subsidisation
and level of import competition.
7.3%8.0%
12.9% 13.4%
8.2% 8.5%7.3% 7.4%
14.7%
12.2%
14.7%
12.4%
7.2%
9.8%
0%
2%
4%
6%
8%
10%
12%
14%
16%
FY16a FY17e FY16a FY17e FY15a FY16e FY16a FY17e FY15a FY16e FY15a FY16e FY16a FY17e
Ingham's* Tegel Scandi Standard
LDC SA Pilgrim's Pride
SandersonFarms
Tyson Foods^
EBITDA margin
Poultry products
revenues are
forecast by
management to
increase by 3.4%.
This is underpinned
by a 7.7% increase
in volumes.
Macquarie Wealth Management Inghams Group
21 December 2016 40
Fig 57 ROA (EBIT / Ave Assets)
Source: Macquarie Research, Factset,, December 2016
Our research suggests that USA producers are currently generating higher than long run
average margins and returns benefiting from the lower grain price.
Given the similarities in Australian and New Zealand markets and direct competition in
New Zealand, we view Tegel as the closest and most useful comparison from a revenue
and margin perspective.
Fig 58 Ingham’s comparison to Tegel
Ingham’s* Tegel
Group NZ Segment A$ NZ Segment NZ$ NZ$
FY17e Revenue $m 2375 371.7 388.4 625 FY17 Revenue growth* 2.9% 5.1% 1% 7.6% FY14-17e revenue CAGR 2.1% 3.2% 6.5% FY17e EBITDA $m 190.1 37 38.7 84 FY17 EBITDA growth 13.5% 7.6% 12.0% FY14-17e EBITDA CAGR 10.2% 17.3% FY17e EBITDA % 8.0% 10.0% 13.4% FY16 pro forma Net debt $418m $118m Gearing (FY16 Net debt /EBITDA) 2.5x 1.6x Gearing (FY16 Net debt /FY17e EBITDA)
2.2x 1.4x
FY16 ROA 15.3% 8.5% FY16 ROTA 15.3% 16.5%
Source: Macquarie Research, Tegel company data based on PFI forecasts, December 2016
All comparisons done on a 52-week basis
Tegel’s FY14-FY16 revenue growth has been ahead of Ingham’s at both the group and
NZ segment level. In our view, this appears to reflect relative growth rates in the NZ
market, currency translation and export growth. Looking at FY17 forecasts in NZ$,
Ingham’s management are forecasting ~1% revenue growth versus Tegel’s PDS which is
assuming 9% revenue growth. One of the key differences would appear to be around
pricing with Tegel assuming domestic price/mix to increase by 0.9% versus Ingham
commentary which suggests forecasts are predicated on price deflation in the NZ market
due to market supply conditions.
At the group level Ingham’s margins are ~560-570bp below Tegel’s. The key
difference in our view relates to the relative contribution from higher margin New Zealand
market. Tegel generated 82.5% of FY16 revenues from the NZ domestic market, with
17.5% of sales export. NZ represented 15% of Ingham’s FY16 sales.
15.3%
8.7%
16.5%
7.5% 8.5%10.3%
37.0%34.1%
0%
5%
10%
15%
20%
25%
30%
35%
40%
FY16a FY16a FY16a FY15a FY16a FY16a FY15a FY15a
Ingham's Tegel Tegel (ROTA)
ScandiStandard
LDC SA TysonFoods
Pilgrim'sPride
Sanderson Farms
At the group level,
Ingham’s margins
are ~560-570bp
below Tegel’s
Macquarie Wealth Management Inghams Group
21 December 2016 41
Our research suggests that New Zealand (NZ) has a more favourable industry structure
with the top two producers controlling a greater market share. Chicken producers are not
alone in generating higher margins from New Zealand relative to Australia. The retail end
market is generally more conducive for suppliers. While feed costs are typically higher, NZ
operations also benefit from lower labour rates, lower rental costs and higher FCR’s.
The table below provides a breakdown of the margin contribution. It shows Tegel had
higher gross margins and operating costs as a percent of sales in FY16. This is impacted
by differences in cost allocation between GM% and Distribution/SGA.
Fig 59 Ingham’s vs Tegel’s margin metrics
FY16 operating results (% of sales) Ingham’s Tegel*
Cost of Sales 81.7% 72.5% Gross Profit margin 18.3% 27.5% Distribution 6.1% 8.5% SG&A 4.5% 8.2% Distribution + SG&A 10.6% 16.7% EBITDA margin 7.3% 12.9% D&A 1.5% 2.8% EBIT margin 5.8% 10.1%
Source: Ingham’s company data, *Tegel company data from PFI, December 2016
The table below highlights that Ingham’s margins within the NZ segment remain below
Tegel’s. Corporate allocation and royalty charges muddy this analysis. Tegel’s margins on
a like for like basis logically benefit from greater scale given their market share and their
lower distribution costs with production undertaken on both the North and South Island.
Tegel has also already undergone a number of capital and operational initiatives under its
former private equity owners.
Fig 60 Ingham’s NZ segment compared to Tegel
FY16 (% of sales) Ingham’s (NZ segment) Tegel
EBITDA margin 10.0% 12.9% D&A 1.6% 2.8% EBIT margin 8.4% 10.1%
Source: Ingham’s company data, Tegel company data from PFI, December 2016
While Ingham’s NZ margins as reported are lower than Tegel’s, we expect it is the
Australian operations that have the most potential for margin improvement as a result of
Project Accelerate initiatives.
Tegel’s returns are diluted by its large intangibles balance versus Ingham’s with no
intangibles. Tegel’s balance sheet had $335m of intangible assets at end FY16. Tegel’s
return on tangible assets was 16.5% in FY16 versus Ingham’s at 15.3%. Ingham’s has a
higher asset turn (2.4x FY16) which helps to offset the lower margins relative to Tegel
(1.6x excluding intangibles).
We note that both Tegel and Ingham’s have undertaken sale and leaseback transactions in
recent years. Tegel’s Year one operating lease commitments are NZ$22.5m which
represents 27% of FY17e EBITDA. Ingham’s Year One operating lease commitments are
$72m which represents 38% of EBITDA. In isolation, this operating lease differential (as
a % of EBITDA) accounts for 90bp of Ingham’s lower EBITDA margin vs Tegel which
is a relatively small part of >500bp overall margin difference.
Macquarie Wealth Management Inghams Group
21 December 2016 42
Balance sheet
The pro forma and statutory balance sheets are detailed below.
Fig 61 Pro forma balance sheet as at 25- June 16
Statutory Impact of the Offer Pro Forma
$ millions 25 June 2016 and refinancing 25 June 2016
Current assets Cash and cash equivalents 75.3 (24.0) 51.3 Trade and other receivables 221.3 - 221.3 Biological assets 115.3 - 115.3 Inventories 159.6 - 159.6 Current tax assets - 3.4 3.4 Assets classified as held for sale 1.2 - 1.2 Total current assets 572.7 (20.6) 552.1 Non-current assets Investments accounted for using the equity method
1.6 - 1.6
Property, plant and equipment 372.0 - 372.0 Deferred tax assets - 0.7 0.7 Total non-current assets 373.6 0.7 374.3 Total assets 946.3 (19.9) 926.4 Current liabilities Trade and other payables (239.7) 4.5 (235.2) Borrowings (21.2) 21.2 - Current tax liabilities (5.0) 5.0 - Provisions (93.3) - (93.3) Derivative financial instruments (7.9) 5.7 (2.2) Total current liabilities (367.1) 36.4 (330.7) Non-current liabilities Trade and other payables (2.7) - (2.7) Borrowings (520.3) 102.1 (418.2) Provisions (44.1) - (44.1) Derivative financial instruments (6.5) 6.5 - Deferred tax liabilities (6.8) 6.8 - Total non-current liabilities (580.4) 115.4 (465.0) Total liabilities (947.5) 151.8 (795.7) Net (liabilities)/assets (1.2) 131.9 130.7 Equity Contributed equity 107.8 164.5 272.3 Reserves 33.4 13.0 46.4 (Accumulated losses)/Retained earnings (142.4) (45.6) (188.0) (Deficiency of equity)/Total equity (1.2) 131.9 130.7
Source: Ingham’s Company data, December 2016
Ingham’s asset base primarily consists of working capital and PPE. There are no intangible
assets. Ingham’s has a deficit in shareholder funds as a result of previous restructuring
and sale and leaseback activities. This included the sale of a portfolio of Ingham’s land and
buildings for $540m in FY15.
Ingham’s had pro forma net working capital investment of $254.7m. Working capital
includes $115.3m of biological assets which are recognised at cost less accumulated
depreciation. They are reclassified to inventory once processed.
Property plant and equipment totalled $372.0m. This includes 33 freehold properties. FY15
and FY16 other income included revenues from property asset sales.
Ingham’s asset base
primarily consists of
working capital and
PPE. There are no
intangible assets.
Macquarie Wealth Management Inghams Group
21 December 2016 43
Fig 62 Indebtedness
Statutory (pre-Completion)
Pro Forma (post
Completion)
Estimated net indebtedness
immediately prior to
Completion of the Offer
Estimated net indebtedness
immediately following
Completion of the Offer
$ millions 25 June 2016 25 June 2016 29 October
2016 11 November
2016 Current borrowings Bank loan 21.2 - 41.7 30.0 Current borrowings 21.2 - 41.7 30.0 Non-current borrowings Bankloan 480.3 418.2 480.3 418.2 Promissory note 40.0 - 41.3 - Non-current borrowings 520.3 418.2 521.6 418.2 Total borrowings 541.5 418.2 563.3 448.2 Cash and cash equivalents (75.3) (51.3) (50.3) (30.0) Net Debt 466.2 366.9 513.0 418.2 Net Debt/FY16 proforma EBITDA 2.2x 2.5x Net Debt/FY17 proforma EBITDA 1.9x 2.2x Pro forma FY16 EBITDA/ FY16 net finance costs 9.3x 9.3x Pro forma FY17 EBITDA/ FY17 net finance costs 12.3x 12.3x
Source: Ingham’s company data, December 2016
In our view, Ingham’s balance sheet will be in a solid position from a gearing perspective.
Net debt in November 2016 is forecast to be $418.2m. The difference between gearing
levels from end of June 2016 to November 2016 are the cash outflows relating to the
Cardiff site closure in August 2016 ($15.0m), redundancy payments associated with head
office relocation ($10.5m) and short term incentive payments ($5.0m) partially offset by
operating cashflows. We note that end of September is generally the peak inventory period
for Ingham’s due to build-up of inventories of turkey for the Christmas trading period.
Net debt to pro forma EBITDA is 2.5x FY16 pro forma EBITDA, reducing to 2.2x FY17
pro forma EBITDA. Given the strong free cashflows forecast by management, we expect
net debt to FY17 EBITDA to reduce to around 2.0x by the end of FY17.
At end of FY16 Ingham’s had $72.4m of operating lease commitments for the year ahead.
Based on FY17 pro forma net interest expense we calculate a FY17 pro forma EBITDA
fixed charges cover of ~3.0x.
Banking facilities
Ingham’s will have access to syndicated financing facilities comprising:
$250m 3 year term loan facility A;
$170m 4 year term loan facility B; and,
$125m 3 year multi-option revolving working capital facility C.
The facilities are variable rate. Ingham’s policy is to maintain a significant portion of
borrowings at fixed rates using interest rate swaps.
At completion Ingham’s will have undrawn funds of $43m in the revolving facilities to fund
working capital, capex and other general corporate purposes. This is after $51m of
contingent liabilities as at 25 June 2016 which relates to bank guarantees to third parties
for supply of services to support normal business activities. The group self-insures for
workers’ comp.
The FY17 interest cost of $16.3m assumes facilities A and B are full drawn for the year
and Facility C is drawn to $30m at the start of the year with any cash equivalents above
$40m applied to reduce Facility C over the course of FY17. The net finance cost implies a
net interest rate (base rate plus margin) of 3.44% applied to the $420m drawn amount plus
the forecast drawdown on facility C.
Net debt to pro
forma EBITDA is
2.5x FY16 pro forma
EBITDA, reducing to
2.2x FY17 pro forma
EBITDA
Given the strong
free cashflows
forecast by
management, we
expect net debt to
FY17 EBITDA to
reduce to around
2.0x by the end of
FY17
Net debt to pro
forma EBITDA is
2.5x FY16 pro forma
EBITDA, reducing to
2.2x FY17 pro forma
EBITDA.
Given the strong
free cashflows
forecast by
management, we
expect net debt to
FY17 EBITDA to
reduce to around
2.0x by the end of
FY17.
Macquarie Wealth Management Inghams Group
21 December 2016 44
Covenants will be tested semi-annually. They include:
EBITDA net interest expense cover of not less than 3x.
Net debt to EBITDA not greater than 3.5x.
Fig 63 Gearing comparison (last reported net debt/last reported EBITDA)
Source: *Ingham’s company data (FY16), Factset, December 2016
The chart above compares Ingham’s gearing levels to a range of other ASX-listed food and
staple producers and International poultry peers. Ingham’s FY16 pro forma gearing levels
(2.5x) are at the upper end of the peer group although with its strong cash generation, we
forecast gearing to reduce more in line by end FY17 (2.0x).
Cashflow
Set out below is a summary of Ingham’s historical pro forma and pro forma and statutory
forecast cashflows.
Fig 64 Pro forma historical and forecast cash flow
Pro Forma Historical Pro Forma
Forecast $ millions FY14 FY15 FY16 FY17
52 weeks 52 weeks 52 weeks 52 weeks
EBITDA 142.1 114.5 167.5 190.1 Non-cash items 0.4 -6.0 -0.3 1.0 Changes in Adjusted Working Capital
-3.9 26.8 -11 2.9
Changes in provisions 1.0 4.1 - -2.0 Adjusted Operating Cash Flow 139.6 139.4 156.2 192 Capital Expenditure -37.2 -44.4 -76.8 -85 Proceeds from disposal of property, plant and equipment
2.2 2.0 0.1 -
Proceeds from sale of assets held for sale
- 16.9 6.5 -
Adjusted Free Cash Flow 104.6 113.9 86.0 107 Tax paid -7.5 Interest and finance charges paid -15.4 Net cash flow (before dividends) 84.1
Source: Ingham’s company data, December 2016
0.0x
0.5x
1.0x
1.5x
2.0x
2.5x
3.0x
3.5x
4.0x
Ingham's Limited*
Tegel Group Holdings
Costa Group Holdings
Asaleo Care
Tassal Group
Huon Aquaculture
Group
Tyson Foods
Pilgrim's Pride
Scandi Standard
Macquarie Wealth Management Inghams Group
21 December 2016 45
Ingham’s had net working capital investment of $254.7m at end FY16. In our view, it is
relatively working capital intensive given the duration of the production process.
Ingham’s net working capital investment reduced FY14-FY16 with improvements in
inventory management and negotiation of extended supplier terms.
As can be seen in the chart below, Ingham’s appears to be broadly in line with peer group
from a net working capital efficiency perspective. Differences in market structures and
supply chain do muddy this analysis.
Fig 65 Net working capital analysis
Source: Macquarie Research, Factset, December 2016
In our view, Ingham’s generates both strong operating and free cashflow conversion.
Fig 66 Strong cash conversion
Source: Macquarie Research, December 2016
We expect the strong cashflows to support investment in the underlying asset base as well
as payment of dividends.
-100
-50
0
50
100
150
Ingham's* Tegel Scandi Standard
LDC SA TysonFoods
Pilgrim'sPride
SandersonFarms
Receivables Inventory Payables Net Working Capital Average NWC
Days working capital
98.2%
121.7%
93.3%101.0%
73.6%
99.5%
51.3%56.3%
0%
20%
40%
60%
80%
100%
120%
140%
FY14a FY15 FY16a FY17e
%
Adjusted EBITDA operating cashflow conversion Adjusted free cashflow conversion
Ingham’s appears
broadly in line with
peer group from a
net working capital
efficiency
perspective.
Ingham’s appears
broadly in line with
peer group from a
net working capital
efficiency
perspective.
Macquarie Wealth Management Inghams Group
21 December 2016 46
Fig 67 Pro forma capex
Source: Ingham’s company data , December 2016
The use of third-party growers and operators of upstream breeder farms reduces the
overall capital intensity of the production process from Ingham’s perspective. These parties
invest in their own shed infrastructure typically on the back of multiyear supply contracts.
Ingham’s has invested significant capex to increase capacity and drive production
efficiencies. Capacity growth capex from FY14-FY16 mainly related to expansion of
breeder farms and hatcheries. Profit improvement capex has largely been driven by
Project Accelerate initiatives.
In FY15 Ingham’s invested in expansion of its hatchery network, primary processing
equipment and new distribution centre fit-out.
FY16 spend included $14.7m to increase capacity and improve the breeder farm network,
$5.5m to expand primary processing capacity and a $5.0m investment in the hatchery
network.
FY17 forecast expenditure includes $12.6m investment in the breeder farm network
and a $6m investment in the hatchery network to increase capacity and improve
efficiency.
Profit improvement capex largely relates to investment in automation systems and
equipment. FY17 forecasts include a $19.1m investment in automation systems and
$11.0m investment in feed mill operations.
Stay in business or maintenance capex increased into FY16 and is forecast to remain at
around those levels into FY17 primarily due to upgrades and replacement of IT equipment,
software and telecommunication systems.
22.1 20.632.6 31.3
6.115.3
32.123.6
9
8.5
12.123.6
0
10
20
30
40
50
60
70
80
90
FY14a FY15 FY16a FY17e
$m
Maintenance Capacity growth Profit improvement
37.244.4
76.8 85.0
Capacity growth
capex from FY14-
FY16 mainly related
to expansion of
breeder farms and
hatcheries.
Macquarie Wealth Management Inghams Group
21 December 2016 47
Fig 68 Capex/sales for peer group
Source: Macquarie Research, Factset, December 2016
Ingham’s capex/sales has increased from 1.7% of revenues in FY14 to 3.6% forecast in
FY17 given the Project Accelerate investments. This is broadly in line with international
peer group. It is below Tegel’s recent investment on a percent of revenue basis (4.5% in
FY16) but at $77m versus $26.2m in FY16 is well above in absolute dollar terms.
Dividend policy
The Directors intend to pay out 65-70% of Ingham’s NPAT commencing in FY17, with
intention to pay out between 65-70% of Ingham’s pro forma NPAT in FY17. The first
dividend to shareholders will be determined in respect of period from completion to 24
December 2016 and will become payable in March 2017. Ingham’s expects to be in a
position to pay franked dividends.
Sensitivity Analysis
We note the limitations of the sensitivity analysis presented in the table below in that it
assumes all other variables remain unchanged.
Fig 69 Sensitivity analysis
FY17 pro forma NPAT Assumption Increase / Decrease Impact ($ million)
Average selling price +/- 1% +16.7 / (16.7) Sales volume +/- 1% +4.6 / (4.6) Feed cost +/- 5% (2.4) / +2.4 Interest rates +/- 50bps (1.1) / +1.1 EBITDA margin +/- 0.1ppt 1.7 / (1.7) AUD/NZD translation rate +/- 5 cents (2.3) / 2.5
Source: Ingham’s company data, December 2016
Pro forma adjustments to the Adjusted Statutory Historical Results and Statutory Forecast
Results
The adjusted statutory historical results have had the depreciation and amortisation
removed from COGS and other certain line items to calculate EBITDA and EBIT.
The table below provides a reconciliation of revenue, EBITDA and NPAT from the Adjusted
Statutory Results and Forecast to the Pro Forma Results and Forecasts.
Key adjustments include the removal of:
53rd
week contribution in FY14 and FY17;
site closure and transformation costs in FY16;
sale and leaseback impacts on FY14 and FY15 results
0%
2%
4%
6%
8%
10%
12%
14%
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Tegel Tyson Sandersons Pilgrim's Hormel LDC SA
The Directors intend
to pay out 65-70% of
Ingham’s NPAT
The Directors intend
to pay out 65-70% of
Ingham’s NPAT
Macquarie Wealth Management Inghams Group
21 December 2016 48
Fig 70 Pro forma adjustments to the Adjusted Statutory Results and Forecasts
Historical Forecast
$ millions FY14 FY15 FY16 FY17 53 weeks 52 weeks 52 weeks 53 weeks
Adjusted statutory revenue 2,277.4 2,273.8 2,308.7 2,419.3 Discontinued piggery business -5.7 -1.9 - - Removal of 53rd week -41.2 - - -44.3 Pro forma revenue 2,230.5 2,271.9 2,308.7 2,375.0 Adjusted statutory EBITDA 126.7 301.7 106.6 144.1 Discontinued piggery business 2.8 0.6 - - Removal of 53rd week -2.4 - - -4.3 Removal of site closure costs - 1.7 14.9 3.1 Removal of transformation costs - 13.1 19.3 3.3 Removal of relocation of head office costs
- - 25.4 -
Removal of advisory fee 3.0 3.1 3.1 1.0 Removal of TPG Entities acquisition costs
58.3 - - -
Removal of profit on sale and leaseback
- -188.9 - -
Inclusion of rental costs on sale and leaseback
-44.1 -14.6 - -
Removal of costs of the Offer - - 0.4 30.7 Inclusion of transaction costs -2.2 -2.2 -2.2 -0.6 Removal of existing LTI scheme - - - 4.5 Removal of transaction bonuses - - - 8.6 Inclusion of new LTI scheme - - - -0.3 Pro forma EBITDA 142.1 114.5 167.5 190.1 Adjusted statutory NPAT 0.1 146.9 25.2 45.3 Discontinued piggery business 2.0 0.4 - - Removal of 53rd week -0.8 - - -2.3 Removal of site closure costs - 1.2 10.5 2.2 Removal of transformation costs - 9.2 13.5 2.3 Removal of relocation of head office costs
- - 17.8 -
Removal of advisory fee 2.2 2.2 2.2 0.7 Removal of TPG Entities acquisition costs
55.7 - - -
Removal of profit on sale and leaseback
- -132.3 - -
Inclusion of rental costs on sale and leaseback
-27.9 -10.2 - -
Removal of costs of the Offer - - 0.3 21.6 Inclusion of corp. company costs -1.6 -1.6 -1.6 -0.5 Removal of existing LTI scheme - - - 4.5 Removal of transaction bonuses - - - 6.0 Inclusion of new LTI scheme - - -0.3 Removal of write-off of capitalised debt costs
- - - 5.0
Removal of debt break costs - - - 10.3 Change in capital structure 27.3 35.9 15.2 4.0 Pro forma NPAT 57.0 51.7 83.1 98.8
Source: Ingham’s company data, December 2016.
Macquarie Wealth Management Inghams Group
21 December 2016 49
Company Overview
Fig 71 Operations overview
Source: Ingham’s company data, December 2016
Macquarie Wealth Management Inghams Group
21 December 2016 50
Ingham’s is the largest vertically integrated chicken and turkey producer across Australia
and New Zealand, with sales of A$2.3bn in FY16 and approximately 8,200 employees.
Ingham’s holds the #1 and #2 positions amongst chicken producers in Australia and New
Zealand with 40% and 34% estimated chicken market share, respectively, and is a key
supplier to major retailers, QSR operators, foodservice distributors and wholesalers in both
of those markets.
In addition to chicken, Ingham’s holds strong market positions across Australian turkey, the
Australian stockfeed and the New Zealand dairy feed industries.
From FY15 to FY16, Ingham’s pro forma EBITDA grew by 46% to $167.5m. This reflected
a low FY15 base due to a decline in gross profit. This reflected a combination of factors,
including loss a genetics supply issue, loss of a customer and operational planning issues.
Ingham’s forecasts that pro forma EBITDA will increase by 13.5% to $190.1m in FY2017.
Fig 72 Poultry accounted for 87% of FY16a revenues Fig 73 Australia the largest end market with 83% of FY16a revenues
Source: Ingham’s company data, December 2016 Source: Ingham’s company data, December 2016
Poultry
Fig 74 Ingham’s produced over 440kt of poultry in FY16…
Fig 75 …which is equivalent to 190m birds
Source: Ingham’s company data, December 2016 Source: Ingham’s company data, December 2016
Poultry, A$2,013.7m
, 87%
Stockfeed, A$293.1m,
13%
Other , A$1.9m, 0%
FY16aRevenue:
A$2,308.7m
Australia, 83%
NZ, 15%
Exports, 2%
FY16aRevenue:
A$2,308.7m
Australia, ~374kt,
84%
NZ, ~70kt, 16%
FY16aVolume:444.2kt
Australia, ~160m,
84%
NZ, ~30m, 16%
FY16aVolume:
~190m birds
Ingham’s is the largest vertically integrated chicken and turkey producer across Australia and New Zealand Ingham’s is the largest vertically integrated chicken and turkey producer across Australia and New Zealand
Macquarie Wealth Management Inghams Group
21 December 2016 51
Product overview
The table below provides a summary of the key poultry product categories as well as the
Stockfeed business.
Fig 76 Summary of Ingham’s product categories
Source: Ingham’s company data, December 2016
Ingham’s continues to innovate its product portfolio in response to the following key
consumer trends that have driven recent growth in poultry consumption:
consumers’ desire for foods that improve their health and well-being;
demand for convenience; and
increasing interest in animal welfare and food provenance.
The growth of free range, value-enhanced and further processed products, whose share of
Ingham’s poultry revenue was increased from 50% in FY05 to 62% in FY16. Ingham’s
stated that this illustrates how consumer trends have driven recent changes in
consumption patterns.
Macquarie Wealth Management Inghams Group
21 December 2016 52
Fig 77 Ingham’s chicken net sales by category: Free range and value enhanced a bigger part of the mix
Source: Ingham’s company data, December 2016
Ingham’s management believes that it is well positioned to benefit from these consumer
trends through the following:
a shift to higher animal welfare standards such as free-range and RSPCA-approved
chickens;
value-enhanced product production at its primary plants; and
producing partially cooked and fully cooked products at its further processing plants.
Ingham’s has responded to changing consumer preferences by introducing a range of new
products including free range, pre-packaged, further processed and celebrity chef-
endorsed products.
Ingham’s ability to respond to these changing consumer preferences, supported by its
recent investment in the capacity and capability of its network and its people, has
supported Ingham’s growth and position as a leading producer across the Australian and
New Zealand poultry markets in recent years.
Fig 78 Premium pricing for Free Range & Organic chicken breast over primary processed breast
Fig 79 Further Processed products attract a varying premium over breast fillet depending on product
Source: Macquarie Research analysis of Grocery Cop data, December 2016
Source: Macquarie Research analysis of Grocery Cop data, December 2016
Primary processed, 50%
Primary processed, 38%
Free range, 1%Free range, 12%
Value enhanced, 15% Value enhanced, 22%
Further processing, 34%
Further processing, 28%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY05a FY16a
$9.0
65%
250%
$0
$5
$10
$15
$20
$25
$30
Primary Processed Free Range
Organic
$/kg
$9.0
40%
120%
190%
$0
$5
$10
$15
$20
$25
$30
Primary Processed Breast
Ingham'sBreast Nuggets
Ingham's Breast Tenders
Ingham's Chicken Kiev
$/kg
Ingham’s believes it
is well positioned to
benefit from a shift
to higher animal
welfare standards
and convenience.
Macquarie Wealth Management Inghams Group
21 December 2016 53
However, we believe it is important to view demand growth and preference changes (as
well as any market share shifts in the context of “balancing the bird”. For example, the
recent spike in demand for BBQ birds through the retail channel (driven by retail price
discounting), is clearly favourable for chicken suppliers such as Ingham’s from a demand
perspective.
However, these birds are of a specific weight range, and Ingham’s needs to be able to sell
all other chicken (that falls outside of the desired size/weight) without significant
discounting or wastage. Without securing demand (and adequate operational planning) for
this “fall out”, chicken suppliers face the prospect a substantially eroding any benefit from
the initial demand spike.
As detailed in subsequent sections, the industry’s efforts to “balance the bird” following an
increase in the supply of BBQ birds resulted in wholesale market price pressure in the
fourth quarter for FY16.
Fig 80 ‘Balancing the bird’: Products and markets are required to utilise all the birds produced
Source: Macquarie Research, December 2016
It is worth noting that, chicken suppliers look to sell all of the bird (not just every bird), in
order to optimise profitability.
Fig 81 ‘Balancing the bird’: It is important to sell all of the bird
Source: Macquarie Research presentation of Cobb company data (Cobb 500), December 2016
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0Target
Weight
FalloutFallout
Retail
BBQ birds
Frames (bones)19%
Raws (ex frames)25%
Wings8%
Drumstick9%
Thigh15%
Breast25%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
<Ingredients Dressed weight >
It is important to view demand growth and preference changes (as well as any market share shifts) in the context of “balancing the bird”. It is important to view demand growth and preference changes (as well as any market share shifts) in the context of “balancing the bird”.
Macquarie Wealth Management Inghams Group
21 December 2016 54
Supply chain and production process
Ingham’s Poultry operation is a large scale vertically integrated business spanning the
entire value chain, including 1 quarantine facility, 10 feedmills, 74 breeder farms,11
hatcheries, 225 broiler farms (predominantly contracted) as well as 7 primary processing
plants, 7 further processing plants, 1 protein conversion plant, and 9 distribution centres
across Australia and New Zealand. Ingham’s also operates a Stockfeed business, which
holds strong market positions in the Australian stockfeed and New Zealand dairy feed
industries.
Fig 82 Complex supply chain requires integrated planning and optimisation
Note: Time frames are indicative and relate to chicken. (1) Great Grand Parents; (2) Grand Parents; (3) The majority of Broiler farms are operated by contracted third party growers. Source: Ingham’s company data, December 2016
Fig 83 Ingham’s network
Facilities / farms1 Australia NZ Total
Quarantine 1 0 1
Feedmill 8 2 10
Breeding farms 60 14 74
Hatchery 10 1 11
Broiler farms
2,3 188 37 225
Primary processing3 6 1 7
Further processing 5 2 7
Distribution centre 7 2 9
Protein conversion plant 1 0 1
Total 286 59 345
1. Includes Turkey and 4 contracted NZ breeder farms. Does not account for breeder and hatchery expansion projects approved or underway. Excludes Leppington R&D facility, non-operational sites and offices. Farming areas shown for illustrative purposes only. 2. Includes contracted growers and company owned farms 3. Excludes Cardiff primary processing plant and associated contracted growers
Source: Ingham’s company data, December 2016 Source: Ingham’s company data, December 2016
Ingham’s owns all its operating plant and equipment, while its land and buildings are
managed either through leasehold or freehold arrangements. Ingham’s operate 79
leasehold properties, the majority of which are secured with 20 year terms with options to
extend (five further terms, with each term for 10 years). The three largest landlords hold
53% of all leases.
Ingham’s Poultry
operation is a large
scale vertically
integrated business
spanning the entire
value chain
Ingham’s Poultry
operation is a large
scale vertically
integrated business
spanning the entire
value chain
Ingham’s owns all its operating plant and equipment, while its land and buildings are managed either through leasehold or freehold arrangements. Ingham’s owns all its operating plant and equipment, while its land and buildings are managed either through
Macquarie Wealth Management Inghams Group
21 December 2016 55
Lease terms for the majority of Ingham’s breeder farms, hatcheries and feedmills are
subject to annual CPI linked indexation (including on commencement of options), capped
at 2.5% p.a. Processing plants are subject to annual CPI linked indexation, capped at 2.5-
3.0% p.a. for Australian processing plants, and are reviewed to market on
commencement of each option (market reviews are subject to a cap and collar of 110%
and 90% respectively for Australian processing plants).
Ingham’s also own 33 freehold properties, including the Bungonia quarantine station.
Ingham’s national scale and vertically integrated operations provide a number of benefits,
such as:
flexibility and greater resilience to respond to external market pressures;
ability to shift production between Australian states to meet changes in customer
demands;
maintaining quality assurance, while optimising cost efficiencies across the whole
value chain; and
ability to reduce operating or agricultural risks through geographic diversification.
Genetics overview and supply arrangements
The poultry production process begins with the importation of Great Grand Parent (“GGP”)
eggs by two global leaders in poultry genetics, Aviagen and Cobb-Vantress, Inc. Ingham’s
has a long-term supply agreement for its supply of parent stock.
In May 2016, Ingham’s renewed its Australian supply contract with Aviagen, its main
genetics supplier, and is uncontracted with Cobb-Vantress, its alternate supplier.
Poultry genetic suppliers develop birds capable of delivering best in class performance and
undertake breeding programs that support ongoing improvement in the feed conversion
ratio, robust breeder performance and other key characteristics. The long term cycle of
research and development provides multi-year visibility of improvements.
Ingham’s Bungonia quarantine facility in New South Wales is owned by Ingham’s and
managed by Aviagen. This facility is one of only two privately owned poultry quarantine
facilities in Australia.
Breeders
Fig 84 Breeder quality is critical to performance
Source: Ingham’s company data, December 2016
Day Old Parents (“DOP”) are transferred from Ingham’s genetics suppliers to Ingham’s
parent breeder farms where they are reared and mated to produce eggs for the final
generation of meat chickens known as “broilers”.
A4 Paper Guide Line
A4 Paper Guide Line
Hatchability
Feed conversion ratio
Bird health
Day old parentquality and genetics
Biosecurity management
Feed quality
Optimal environmental conditions
Best-practice husbandry
Liveability
The poultry
production process
begins with the
importation of GGP
eggs by two global
leaders in poultry
genetics, Aviagen
and Cobb-Vantress,
Inc.
The poultry
production process
begins with the
importation of GGP
eggs by two global
leaders in poultry
genetics, Aviagen
and Cobb-Vantress,
Inc.
Ingham’s operates 74
chicken and turkey
breeder farms across
Australia and New
Zealand.
Ingham’s operates 74
chicken and turkey
breeder farms across
Australia and New
Macquarie Wealth Management Inghams Group
21 December 2016 56
Parent breeder farms utilise technology and automation to minimise performance variation
spanning areas such as temperature, humidity, lighting, feeding, watering and egg
collection. Control and effective management of the breeder network is critical to
optimising business performance.
Ingham’s operates 74 chicken and turkey breeder farms across Australia and New
Zealand. Breeder operations are typically conducted in two stages: DOP are placed on a
rearing farm for ~22 weeks before being transferred to a production farm where they lay
eggs and remain for an additional 40-48 weeks . Production farms are equipped with nest
boxes and other equipment required for egg collection and transfer.
Fig 85 Hatchability diminishes with the age of the parent
Source: Macquarie Research analysis of Aviagen company data, December 2016
Hatcheries
Eggs are transferred from breeder farms to hatcheries where they are incubated before
hatching. Precise matching of egg supply and demand is met through interstate egg
transfers that can be achieved at relatively low cost. Ingham’s operates 11 hatcheries
located throughout Australia and New Zealand, including 2 dedicated to turkey.
Ingham’s hatchery facilities are equipped with egg holding rooms which provide the
flexibility for chick production to be matched to fluctuations in demand. Facilities are also
equipped with automated setting systems that control the hatchery environment.
Fig 86 Overview of hatcheries as at 1 September 2016
Region Location Production type
Queensland Mt Alford Chicken New South Wales McKees Hill Chicken New South Wales Maldon Chicken New South Wales Tahmoor Turkey New South Wales Bargo Turkey Victoria Pakenham Chicken Victoria Mornington Chicken South Australia Murraylands Chicken Western Australia Wanneroo Chicken Tasmania Premaydena Chicken New Zealand Matamata Chicken
Source: Ingham’s company data, December 2016
75%
77%
79%
81%
83%
85%
87%
89%
0
20
40
60
80
100
120
140
160
180
200
25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63
Hatchability (%) Egg/Bird Chick/Bird
Ingham’s operates
11 hatcheries
located throughout
Australia and New
Zealand, including 2
dedicated to turkey.
Ingham’s operates
11 hatcheries
located throughout
Australia and New
Zealand, including 2
dedicated to turkey.
Macquarie Wealth Management Inghams Group
21 December 2016 57
Broiler farms
Once hatched, Day Old Chicks (“DOC”) are transferred from hatcheries to broiler farms.
Ingham’s broiler farm network comprises 225 chicken and turkey broiler farms across
Australia and New Zealand, of which 97% are operated by third party operators (‘contract
growers’).
Contract growers operate under standardised contracts (tailored to each state and in New
Zealand) and receive a fixed price per live bird produced (subject to adjustment between
growers based on performance). Ingham’s maintains ownership of the chickens and
supplies the majority of their feed requirements.
After reaching an appropriate weight, live birds are collected from broiler farms and
transferred to primary processing plants for processing into end products.
Fig 87 Relatively similar performance metrics for Ross and Cobb
Source: Macquarie Research analysis of Aviagen and Cobb-Vantress company data, Macquarie Research, December 2016
By outsourcing broiler farming, Ingham’s is able to reduce the capital commitment required
for expansion while still generally retaining control of the integrated production process.
Although outsourced, Ingham’s is heavily involved in monitoring the standards maintained
by its network of contract growers. Ingham’s supplies husbandry and veterinary services
as required and regularly monitors contract growers to ensure compliance with Ingham’s
strict animal welfare, biosecurity and food safety standards.
All of Ingham’s chickens and turkeys are barn raised and cage free. All Ingham’s
Australian chicken broiler farms are accredited by the RSPCA. In addition, Ingham’s
Australian chicken broiler free range farms are also accredited by FREPA. Ingham’s New
Zealand free range chicken broiler farms are accredited by the RSPCA.
RSPCA requirements. We note that RSPCA requirements cover virtually all of the poultry
production process. This includes sourcing of chicks, housing, catching, transport and
slaughter. Key requirements in relation to broiler farms are stocking, lighting, litter,
ventilation and temperature requirements (Source: RSPCA). Further, the RSPCA sets
record keeping and monitoring standards.
Density requirement stipulate 28kg/m2 for natural ventilation systems and 34kt/m
2 for
mechanical ventilation systems (Source: RSPCA). This is 15% higher than chickens
grown outside of the RSPCA system (Source: Australian Chicken Meat Federation).
0.00
0.50
1.00
1.50
2.00
2.50
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
0 5 10 15 20 25 30 35 40 45 50 55 60
Ross bodyweight Cobb bodyweight Ross FCR Cobb FCR
Bodyweight (g) FCRsmall bird big bird
Ingham’s maintains
ownership of the
chickens and
supplies the
majority of their
feed requirements.
Ingham’s maintains
ownership of the
chickens and
supplies the
majority of their
feed requirements.
All of Ingham’s
chickens and
turkeys are barn
raised and cage
free.
All of Ingham’s
chickens and
turkeys are barn
raised and cage
free.
All Ingham’s
Australian chicken
broiler farms are
accredited by the
RSPCA.
All Ingham’s
Australian chicken
broiler farms are
accredited by the
RSPCA.
Macquarie Wealth Management Inghams Group
21 December 2016 58
Indoor maximum and minimum temperatures must be recorded daily (Source:
RSPCA). After 7 days of age, the lighting system in the shed must provide a minimum
period of 8 hours artificial lighting per day — unless birds have access to natural
daylight which provides at least the minimum required intensity — and a minimum
period of 4 hours continuous darkness (with all lights off) to be provided at night, in
every 24-hour period. From 1 January 2015, the light intensity between lighting periods
must be adjusted in a gradual manner (using dimmers or switching individual lights
on/off) over at least 15 minutes (Source: RSPCA).
Birds (except chicks on day of placement) must be observed at least three times in a
24-hour period to ensure that their appearance, vocalisations and behaviour are
normal and inspections must be increased during hot weather or disease outbreak.
We note that RSPCA approved farming program is independently audited.
All of the fresh chicken meat sold in Woolworths supermarkets is produced on RSPCA
approved (or equivalent) farms. Woolworths own-brand products in-store where chicken is
a defined visible ingredient (i.e. chicken pieces) will also use RSPCA (or equivalent)
standard by December 2018 (Source: Woolworths). All Coles Brand fresh chicken is
RSPCA approved.
Primary processing
Fig 88 Overview of primary processing plants as at 1 September 2016
Region Location Production type
Queensland Murarrie Chicken New South Wales Tahmoor Turkey Victoria Somerville Chicken South Australia Bolivar Chicken Western Australia Osborne Park Chicken Tasmania Sorrell Chicken New Zealand Te Aroha Chicken
Source: Ingham’s company data, December 2016
After reaching an appropriate weight, live birds are collected from broiler farms and
transferred to primary processing plants for processing into end products. After arriving,
birds are processed, chilled and prepared as whole birds or meat cuts. Marinades, sauces,
spices and sprinkles can also be added to produce value-enhanced products. Processed
whole birds and meat cuts are then packaged and distributed to external customers or sent
for further processing.
Ingham’s operates 7 primary processing plants across Australia and New Zealand. All
processing plants are equipped with automated processing systems and employ
standardised procedures to manage yield and labour efficiency across the network.
Further processing
After primary processing, meat may be transferred from primary processing plants to
further processing plants for the manufacturing of a range of flash fried, fully cooked,
ready-to-eat and smallgoods products. Ingham’s currently produces approximately 240
further processed products in Australia and 80 in New Zealand, including products such as
schnitzel and nuggets as well as specific QSR menu items. The Ingleburn facility produces
all of Ingham’s smallgoods, with turkey smallgoods accounting for approximately 60% of
total production at Ingleburn with the remainder being chicken smallgoods.
Ingham’s operates 7
primary processing
plants across
Australia and New
Zealand.
Ingham’s operates 7
primary processing
plants across
Australia and New
Zealand.
Macquarie Wealth Management Inghams Group
21 December 2016 59
Fig 89 Component parts & chicken products by broiler part
Part of Chicken Product Example products
Whole chicken Whole Chicken BBQ rotisserie chicken, fresh whole chicken
Breast meat
Primary Poultry Value enhanced Further processed
Fresh breast fillet
Crumbed breast nuggets
Thigh Fresh thigh fillet
Marinated kebabs
Drumsticks Fresh bulk drumsticks
Peri peri drumsticks
Wings Fresh whole wings
Marinated wings
Ingredients
Other poultry products Bagged necks
Palatants Liquid palatant
Wet pet food ingredients Fresh livers
Rendered products Poultry meal
Source: Ingham’s company data, December 2016
Ingham’s further processing network comprises 7 plants in Australia New Zealand.
Ingredients
During primary processing up to approximately 60% of the live bird weight is captured as
‘poultry raws’ (e.g. blood, feathers, livers, feet). Poultry raws can be utilised in a range of
products for human or animal consumption. The Ingredients division is responsible for
maximising the value of poultry raws, with the exception of products sold through the Retail
channel which are managed by Sales and Marketing. Currently, Ingham’s converts
approximately 200k tonnes of poultry raws per annum into ingredients.
The Figure below outlines the range of end products derived from poultry raws.
Fig 90 Ingredient products
Source: Ingham’s company data, December 2016
Warehousing and distribution
Ingham’s distribution capabilities enable it to shift production throughout Australia while
maintaining an unbroken chilled or frozen supply chain. The logistics network is centrally
controlled through distribution requirements planning, ensuring that stock is replenished to
meet customer demand.
Ingham’s operates 9 distribution centres (“DCs”) across Australia and New Zealand as at 1
September 2016. Of these, 8 DCs undertake weigh price labelling of tray packed products.
A4 Paper Guide Line
A4 Paper Guide Line
Breast meat
Ingredients
Wings
Ingredients
Ingredients
Drumstick / Thigh
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21 December 2016 60
Fig 91 Overview of warehousing and distribution network as at 1 September 2016
Region Location Capability
Queensland Hemmant Chilled and frozen
New South Wales Prestons Chilled and frozen
Victoria Lyndhurst Chilled and frozen
South Australia Dry Creek Chilled and frozen
Western Australia Hazelmere Chilled and frozen
Northern Territory Darwin Chilled only
Tasmania Sorell Chilled only
New Zealand Waharoa Chilled and frozen
New Zealand Cambridge Chilled and frozen
Source: Ingham’s company data, December 2016
Once a customer order is confirmed, tray packed products are weighed, priced and
labelled accordingly and palletised with other components of the order. Outsourced freight
providers are used to transport products to customers. Outsourced line haul carriers are
used to balance stock between interstate DCs.
An overview of the warehousing and distribution operations is shown below.
Fig 92 Warehousing and distribution operations
Source: Ingham’s company data, December 2016
Ingham’s distribution channel
Fig 93 Group revenue by channel over time
Source: Ingham’s company data, December 2016
Ingham’s channel mix has been relatively stable over time as illustrated in Figure 89
above.
52% 52% 53%
18% 17% 17%
8% 8% 8%
6% 7% 7%
11% 12% 11%
5% 4% 4%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY14 FY15 FY16
Retail QSR Food Service Wholesale Stockfeed Other
FY
16
a R
ev
en
ue
: A$
2,3
09
m
FY
15
a R
eve
nu
e: A
$2,2
72
m
FY
14
a R
eve
nu
e: A
$2,2
31
m
Macquarie Wealth Management Inghams Group
21 December 2016 61
Fig 94 Chicken distribution channels - Australia Fig 95 Chicken distribution channels - NZ
Source: Ingham’s company data, December 2016 Source: Ingham’s company data, December 2016
Poultry is a critical fresh category for major Australian supermarket chains, with chicken
products representing two of the top five fresh products sold by the four major Australian
supermarket chains by sales. We note that Aldi does not currently offer BBQ chickens.
Ingham’s sells its products to a number of large customers, including major retailers and
QSR operators. During FY16, Ingham’s top 5 customers accounted for 55-60% of
Ingham’s sales revenue.
Fig 96 Long-term relationships with major customers
Source: Ingham’s company data, December 2016
Ingham’s has many long-term customer relationships, as evidenced by its experience
servicing large customers for up to 55 years. Relationships with key customers are highly
collaborative and span sales, marketing, technical services, new product development,
planning and supply chain.
Ingham’s has historically supplied poultry to its customers on an uncontracted basis
including on the basis of either Ingham’s or the customer’s standard terms and conditions
of sale.
Over the last 18 months, Ingham’s management have focused on entering into contracts
with Ingham’s key customers. These contracts are for typically for 2 to 3 years and in a
number of cases a percentage of the customer’s volumes are secured. The contracts
contain various degrees of pass through provisions, including in relation to the cost
of feed and include mechanisms for cost review. Ingham’s management are continuing
to focus on entering into contracts with its customers.
Retail59%Wholesale
20%
Foodservice7%
QSR14%
Estimated share of industry (%) based on revenue in FY16
Retail45%
Wholesale29%
Foodservice10%
QSR16%
Estimated share of industry (%) based on revenue in FY16
55yrs
44yrs
30yrs
15yrs
48yrs
37yrs
26yrs
26yrs
26yrs
Major Retailer 1
Major Retailer 2
Major Retailer 3
Major Retailer 4
Major QSR 1
Major QSR 2
Major NZ Retailer 1
Major NZ Retailer 2
Major QSR
Australia
New Zealand
Since customer
market entry
(QSR1 & MR
3&4)
Since Ingham's
market entry
Years of uninterrupted supply...
Over the last 18
months, Ingham’s
management have
focused on entering
into contracts with
Ingham’s key
customers. These
contracts are for
typically for 2 to 3
years
Over the last 18
months, Ingham’s
management have
Macquarie Wealth Management Inghams Group
21 December 2016 62
Brand
Ingham’s has a long history of supplying Australia and New Zealand’s major retailers, QSR
operators, foodservice distributors and wholesalers. During this time Ingham’s has
developed a strong brand with a reputation for quality and service. Ingham’s brand
presence also includes “Waitoa”, New Zealand’s leading free range brand.
Ingham’s is a highly recognised brand with a reputation for quality and service. Ingham’s is
currently implementing an “Ingham’s” brand refresh focusing on enhancing Ingham’s brand
positioning. This includes improved packaging and a communications campaign
concentrating on the new tagline ‘Heart of the Table’. The refreshed branding reflects the
importance that Ingham’s core customers place on bringing the family together at meal
time and the growing significance of poultry in consumers’ diets. This is mirrored in
Ingham’s core purpose – ‘To be at the Heart of Every Table’.
Fig 97 Brand and packaging refresh
Source: Ingham’s company data, December 2016
Within the Stockfeed business, Ingham’s brands include Mitavite, a premium horse feed
brand sold in over 20 countries, and Top Cow and Top Calf, leading dairy stockfeed
brands in New Zealand
Sales, Marketing and New Product Development
In Australia, sales for Ingham’s major poultry customers are managed at a national level,
with some smaller state-based customers managed regionally. Large customers have at
least one dedicated account manager and all New Zealand customers are managed
locally.
In the past two years, Ingham’s has further invested in marketing and consumer insight
capability, category management skills and New Product Development (“NPD”) resources.
The marketing and consumer insights function focuses on developing brand plans,
communication plans and NPD execution to drive brand growth and optimise mix. The
category management function establishes the long-term strategic growth plan for each
category, working with key customers to ensure pricing, promotion, ranging and in-store
execution support category growth drivers.
NPD is generated from consumer insights, identified market gaps and customer concepts.
Once a product idea is identified, Ingham’s food technologists work with its ingredients
suppliers to develop a formula that will meet customer or consumer expectations, refining
the key product characteristics such as taste, appearance, nutritional value, cost and
packaging.
A stage gate process determines which products are launched and includes consideration
of commercial viability, consumer and customer acceptance and broader market dynamics.
A4 Paper Guide Line
A4 Paper Guide Line
Brand Packaging Brand Packaging
From To
Macquarie Wealth Management Inghams Group
21 December 2016 63
Fig 98 Examples of Ingham’s new product development
Product Description Consumer trend
Created with Jamie range
(Launched May-2014 )
Value-enhanced products including a range of chicken
fillers, skewers and roasts
Health and wellness
Convenience
Premiumisation
Waitoa Gluten Free Range (Launched May-2015)
Identified opportunity to cater to coeliacs and others
who prefer a reduced gluten diet
First to market in New Zealand
Health and wellness
Premiumisation
Diced Chicken Breast (Launched July-2015)
Identified opportunity to provide a convenient, ready-
to-use diced product
Health and wellness
Convenience
Source: Ingham’s company data, December 2016
Macquarie Wealth Management Inghams Group
21 December 2016 64
Feed milling The Australian and New Zealand stockfeed industry supplies feed to commercial livestock,
aquaculture producers and households. Australia utilises approximately 12.2 million tonnes
of stockfeed annually, which represents approximately 1.5% of total global production.
Stockfeed products are typically sold on a bulk basis.
Stockfeed manufacturers convert raw materials into finished feed for animals. Animal
nutritionists develop feed rations specifically formulated to meet the requirements of each
class of livestock and conduct research to continually improve formulations. The primary
raw materials in stockfeed are grains, legumes, vegetable and animal protein meals, and
nutritional additives including minerals and vitamins. Ingham’s is the second largest
stockfeed manufacturer in Australia by volume and accounts for approximately 10% of
commercial stockfeed volumes
Fig 99 Most stockfeed used for internal use, although a reasonable external sales component
Fig 100 Ingham’s the second largest player in a relatively fragmented Australian stockfeed market
Source: Ingham’s company data, December 2016 Source: Ingham’s company data, December 2016
As the primary input for livestock production, the demand for stockfeed is largely driven by
consumers’ demand for livestock, in particular poultry, beef, dairy and pork.
The demand for stockfeed from poultry and pork producers has historically been relatively
stable, as these producers have fewer alternative forms of feed. Demand for stockfeed
from dairy cattle producers has historically fluctuated depending on a number of factors,
including weather conditions and market pricing, as these producers may have more
options available to them (e.g. pasture, hay and silage).
The supply of stockfeed is dependent on the availability and price of component raw
materials, particularly wheat, barley, sorghum and soybean meal. Feed formulations may
be altered (e.g. ingredient substitution) to reflect changes in the availability and pricing of
raw materials. The price of raw materials for stockfeed fluctuates depending on
international commodity prices, the strength of the Australian dollar and local crop
production levels, amongst other things.
Ingham’s feed milling operations
Ingham’s owns and operates 10 feedmills throughout Australia and New Zealand.
Ingham’s prefers to control its own feed supply where possible, with approximately 85% of
Ingham’s demand produced internally in FY16 by the Stockfeed division. Ingham’s
Stockfeed division also sells a range of poultry, pig, horse and dairy stockfeed to external
customers.
One Australian feedmill is dedicated to the production of horse feed and one New Zealand
feedmill is dedicated to the production of dairy feed. Ingham’s has approved the building a
new feedmill in South Australia to replace the mill at Mile End and reduce Ingham’s
reliance on third-party supply.
Internal use, 870kt, 61%
External sales, 560kt,
39%
FY16aStock feed production volume:1.4mt
Ridley14%
Ingham's10%
Riverina6%
Other70%
Stockfeed Market Share (by volume)
~85% of Ingham’s
demand produced
internally in FY16 by
the Stockfeed
division
Macquarie Wealth Management Inghams Group
21 December 2016 65
Fig 101 An overview of Ingham’s feedmill capability*
Poultry Mill Location State Breeder Broiler Layer Turkey Other Poultry^ Pig Dairy
Hemmant QLD Cardiff NSW Berrima NSW Clyde VIC Mile End** SA Wanneroo WA Longford TAS Somersby NSW Mt Maunganui NZ Hamilton*** NZ
* Table summarises capability. Not all feedmills currently produce all feed types of which they are capable. ** To be replaced with greenfield feedmill in 2018 (capable of breeder, broiler feed production, other poultry and pig feed).*** Current production at Hamilton is solely dedicated to dairy feed. All feed produced at Hamilton contains no ruminant proteins. ^ Includes duck and quail. Source: Ingham’s company data, December 2016
This integrated feedmilling network allows Ingham’s to control the composition and quality
of its feed, a key factor in minimising its feed conversion ratio. It also provides Ingham’s
with greater resilience and flexibility in managing raw material costs, which is further
complemented by Ingham’s forward commodity purchasing programs.
Ingham’s Feed Procurement team work closely with schedulers who ensure raw materials
are delivered to meet weekly production requirements seven days in advance.
Fig 102 Ingham’s relies on external stockfeed for ~15% of requirement, however this should decline with planned SA feedmill investment
Source: Ingham’s company data, December 2016
As well as supplying the majority of Ingham’s internal requirements, the Stockfeed division
sells products to external customers, which accounted for ~40% of mill production volumes
and 13% of total group sales in FY16. Ingham’s external stockfeed sales also allow
Ingham’s to reduce its costs of production by increasing ulilisation across the feedmill
network.
The Stockfeed division targets large commercial operators for its stockfeed products as
well as supplying the horse and dairy industry via retail and wholesale channels. The mill
at Hamilton in New Zealand predominantly produces dairy feed, while the mill at Somersby
in New South Wales only produces horse feed, including products sold under the Mitavite
brand.
85%
15%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
Internal
External
An integrated feedmilling network allows Ingham’s to control the composition and quality of its feed
Macquarie Wealth Management Inghams Group
21 December 2016 66
Fig 103 External stockfeed sales by end market category
Source: Ingham’s company data, December 2016
Ingham’s Stockfeed division also serves certain export markets. This includes poultry feed
into Pacific Island markets and Mitavite horse feed, which is sold in over 20 countries, with
key markets including New Zealand, Singapore and Malaysia.
Turkey
Across both Australia and New Zealand, the turkey meat industry is relatively small
compared with the chicken meat industry. The Australian Turkey Federation estimate that
total turkey consumption per capita in Australia is 1.5-2kg per year versus approximately
43kg per year for chicken.
The majority of turkey sales in Australia and New Zealand are uncooked fresh or frozen
products. Turkey is a highly seasonal product with approximately 40% of turkey volume
sold and shipped within a 10 week period in the lead-up to Christmas in Australia. In
response to this seasonality, turkey producers have released new ranges of portioned,
value-enhanced, frozen meals and fresh products in an attempt to increase consumption of
turkey products throughout the year.
There are two major turkey producers in Australia (including Ingham’s) and three relatively
small scale producers in New Zealand.
Chicken, 63%
Other poultry, 6%
Horse, 12%
Pig, 9%
Dairy, 6%
Other, 4%
0% 20% 40% 60% 80% 100%
External feed
sales
Chicken Other poultry Horse Pig Dairy Other
There are two major
turkey producers in
Australia (including
Ingham’s) and three
relatively small
scale producers in
New Zealand.
Macquarie Wealth Management Inghams Group
21 December 2016 67
Ingham’s history
Fig 104 Ingham’s history
Source: Ingham’s company data, December 2016
Ingham’s was founded as a family business in 1918 by Walter Ingham in Liverpool, New
South Wales. After their father’s death in 1953, Walter’s sons, Bob and Jack Ingham,
expanded the business through a combination of organic growth and acquisitions, to
become the largest integrated poultry producer in Australia and New Zealand.
The present-day operations date back to the 1960s when Ingham’s entered into supply
arrangements with major retail and QSR customers. In the late 1960s, Ingham’s started to
engage external farmers to rear broilers while still maintaining control of the poultry
production process to meet increasing consumer demand and ensure efficient utilisation of
capital. Ingham’s subsequently entered into the production of turkey and stockfeed, and
enhanced its further processing capabilities to cater to changing consumer preferences
towards value-enhanced poultry products.
In March 2013 Bob Ingham sold the business to funds advised and managed by TPG
Capital. Today Ingham’s operates a vertically integrated national network and continues to
build on Ingham’s proud history of quality and customer service.
In March 2013 Bob
Ingham sold the
business to funds
advised and
managed by TPG
Capital.
Macquarie Wealth Management Inghams Group
21 December 2016 68
Workforce management & Support functions
Ingham’s people and systems have undergone significant development since January
2015.
Fig 105 People and process capability
Capability Description
Sales and Marketing
A number of changes have been made to the Sales and Marketing function, including investment in category insights, marketing, category management and account management capabilities
National Planning
Ingham’s has nationalised and centralised its planning processes around an experienced team combined with integrated planning expertise from outside the business. The integrated business planning runs on a weekly cycle and has facilitated better decision making across the business.
Operational excellence
An Operational Excellence team has been established to oversee standardisation and continuous improvement in primary processing, further processing and farming operations. Operational Excellence covers asset management, business sustainability, national planning, farming optimisation and work health and safety. The Operational Excellence team is key to transitioning the former regional structure in Australia to a national network.
Asset management
The role of the central Asset Management team has been expanded to oversee repairs and maintenance, as well as capital works. Ingham’s is standardising processes and systems across its business to proactively care for its assets.
People & Performance
Ingham’s has significantly upskilled its human resources capability. Investments have been made to improve capability in core human resources functions areas including recruitment, performance management, people development, remuneration, talent management and succession planning.
Procurement A centralised procurement team is now in place, with dedicated category managers and analysts. This team is realising savings opportunities as well as implementing systems and processes to build a sustainable procurement function.
Strategy & Transformation
Ingham’s has established a Strategy and Transformation team to oversee Project Accelerate, develop Ingham’s ten-year network plan, and support the business in making strategic decisions.
Finance
Ingham’s has made progress towards improving the maturity of the finance function through: − commercial managers being appointed for commercial & trading, primary processing, farming, further processing, supply chain, and sales and marketing; − shared services (accounts payable, accounts receivable and payroll) being brought together under a single structure with a significant uplift in capability through a changeover of personnel; and − New Zealand now has its own dedicated structure and Chief Financial Officer.
IT
Ingham’s is part way through a technical infrastructure refresh which is due for completion in FY17. Once completed this will provide a robust and modern data centre and network platforms. The Ingham’s business systems landscape leverages several major tailored and bespoke systems and various minor applications serving discreet operational and back office functional needs
Source: Ingham’s company data, December 2016
Workforce management
As at 30 June 2016, Ingham’s had over 8,200 employees, employed on a full-time, casual
or part-time basis. The casual workforce is designed to support variations in operational
volumes which are dependent on seasonality, product mix and operational flexibilities. The
capacity to flex the workforce with production variations has been central to Ingham’s
labour efficiency improvements.
Over 90% of Ingham’s workforce is directly employed, with small sections of the operation
contracted out (e.g. cleaning in the primary processing plants and collection of broilers
from broiler farms for transfer to primary processing plants). All wage employees and
contract workers are covered by enterprise agreements, individual employment
agreements, individual contracts or an award. Ingham’s has an audit and compliance
regime in place to monitor contractor compliance to legislated employment practices and
commissions independent audits and assessments.
Approximately 80% of Ingham’s employees are covered by Enterprise Agreements and
other workplace agreements, which require periodic renegotiation and renewal. Ingham’s
is currently party to 56 enterprise agreements across Australia and New Zealand. The six
largest agreements cover ~60% of employees covered by enterprise agreements.
Ingham’s is improving the management of its workforce with the aim of increasing flexibility
and better matching labour requirements to production levels through:
developing workforce planning capabilities;
rebalancing the number of full-time, part-time and casual employees; and
introducing greater flexibility into EBAs.
Ingham’s is
improving the
management of its
workforce with the
aim of increasing
flexibility and better
matching labour
requirements to
production levels
Macquarie Wealth Management Inghams Group
21 December 2016 69
Market structure & channel Market structure
Each of the Australian and New Zealand chicken markets have two large vertically
integrated producers, representing combined estimated chicken market shares of 73% and
82%, respectively. The remainder of the industry is comprised of a number of smaller,
privately owned producers in both markets. The estimated market shares of the two
leading producers in each market have remained relatively stable over the last five
financial years.
Ingham’s is the only chicken producer with production operations in both Australia and
New Zealand, with leading positions in Australia (#1 with 40% estimated chicken market
share) and New Zealand (#2 with 34% estimated chicken market share).
Fig 106 Australia market structure and comparison vs. Baiada
Ingham’s Baiada
Market share (value) 40% 33%
Key poultry brands Ingham’s Steggles
Lilydale
Footprint Nation wide Nation wide
Product range Chicken Chicken
(external sales) Turkey Turkey
Stockfeed Stockfeed
Ingredients Ingredients
Vertical integration
Quarantine facility Yes No
Internal feed operations Yes Yes
Breeder farms Yes Yes
Hatcheries Yes Yes
Primary Processing Yes Yes
Further Processing Yes Yes
Smallgoods Yes Yes
Source: Ingham’s company data, December 2016
Fig 107 NZ market structure and comparison vs. Tegel
Tegel Ingham’s
Market share (value) 48% 34%
Key poultry brands Tegel Ingham’s
Top Hat Waitoa
Tegel Free Range
Rangitikei
Footprint North Island North Island
South Island
Product range Chicken Chicken
(external sales) Stockfeed Stockfeed
Ingredients Ingredients
Turkey
Vertical integration
Internal feed operations Yes Yes
Breeder farms Yes Yes
Hatcheries Yes Yes
Primary Processing Yes Yes
Further Processing Yes Yes
Smallgoods Yes No
Source: Ingham’s company data, December 2016
Ingham's40%
Baiada33%
Other27%
Australian Poultry Market Share (by value)
Ingham's 34%
Tegel48%
Other18%
NZ Poultry Market Share (by value)
Ingham’s is the only
chicken producer
with production
operations in both
Australia and New
Zealand
Macquarie Wealth Management Inghams Group
21 December 2016 70
Poultry sales channels
Poultry in Australia and NZ reaches consumers principally through four major channels:
Retail – all major supermarkets;
QSR – major fast food chains;
Foodservice – large distributors; and
Wholesale – butchers, boners and secondary food processors.
Market distribution channel
In New Zealand, a number of major retailers take delivery of whole birds for cutup and
packing within their own operations. As a result, whole birds account for a greater share of
New Zealand retail volume and a greater proportion of primary cuts are sold through the
wholesale and foodservice channels.
Poultry is an important food category both in Australia and New Zealand. Chicken products
rank as top five supermarket fresh food items in terms of sales for the four major Australian
supermarkets. Leading poultry producers are critical suppliers to, and work closely with,
retailers, QSR operators and foodservice distributors to deliver key marketing initiatives to
grow the category and drive foot traffic through stores.
Imports and regulatory regime
Both Australia and New Zealand operate strict quarantine regimes that restrict the
importation of chicken meat and live chickens. The quarantine regimes are aimed at
protecting native birdlife and commercial operations from pathogens that commonly exist in
wild bird populations and commercial flocks elsewhere in the world.
In New Zealand, only retorted chicken products can be freely imported. Given New
Zealand’s low disease status, cooked chicken meat can be imported to Australia from New
Zealand.
In August 2016, the Australian Government announced that an agreement has been
reached allowing the export of raw poultry products from New Zealand to Australia
within the agreed access framework. These recently announced changes will allow
uncooked New Zealand chicken meat to be imported into Australia in the future, subject to
strict licensing conditions.
Previously, exports from NZ to Australia were limited to products that had been fully
cooked or retorted. We note this agreement followed work undertaken with the Ministry of
Primary Industries to secure changed access conditions given NZ’s high standards of bio
security and low disease prevalence. In FY16, Tegel exports accounted for ~1% (A$70m)
of the A$7.1bn Australian poultry market.
Ingham’s has noted that the importation of fresh chicken to Australia from New
Zealand is challenging from an economic, shelf life and supply chain perspective.
There may be opportunities for imports into Australia of partially cooked and frozen
products, as well as frozen raw chicken meat. Ingham’s management believes it is well
placed to benefit from any opportunities arising from this change, as the only major
poultry producer with production facilities in both markets. New Zealand suppliers will
need to comply with a number of regulations and conditions in Australia including gaining
an import permit, complying with Australian food standards and meeting Australian
labelling requirements. Ingham’s will apply for a permit to export from New Zealand to
Australia.
Live birds cannot be imported into Australia or New Zealand. As a result, genetics supply is
managed via the importation of fertilised eggs into a limited number of quarantine stations,
where they are hatched, grown out and then released by the quarantine service into
breeder farms.
Both Australia and
New Zealand
operate strict
quarantine regimes
that restrict the
importation of
chicken meat and
live chickens
In August 2016, the
Australian
Government
announced that an
agreement has been
reached allowing
the export of raw
poultry products
from NZ to Australia
Importation of fresh
chicken to Australia
from New Zealand is
challenging from an
economic, shelf life
and supply chain
perspective
Importation of fresh
chicken to Australia
from New Zealand is
challenging from an
economic, shelf life
and supply chain
perspective
Macquarie Wealth Management Inghams Group
21 December 2016 71
Turkey imports are subject to the same quarantine regime as chicken products in Australia.
The Australian Department of Agriculture and Water Resources released a draft review in
August 2016 which proposes that the importation of cooked turkey meat to Australia
from the United States of America be permitted, subject to biosecurity measures. As a
result cooked turkey products may be allowed into Australia in the future. Approximately
1% of Ingham’s poultry volumes are cooked turkey products.
In New Zealand, the importation of cooked and frozen turkey products is allowed but is
subject to strict biosecurity and food safety regulations. At present, no countries have met
these requirements, however negotiations are underway with trading partners.
Poultry exports
Approximately 3% of Australia’s annual chicken production is exported . The low level of
chicken exports is due to strong domestic demand for chicken products and the higher cost
base of Australian and New Zealand producers relative to producers in other export
markets. In 2013, over 95% of poultry exports from Australia were made up of frozen cuts
and other edible poultry products. In New Zealand approximately 8% of annual chicken
production is exported, with Australia being the primary export market.
While there may be opportunities to grow exports in the future, they currently make up a
small proportion of Ingham’s sales. Ingham’s poultry exports are focused on balancing
supply and demand, with the surplus supply exported to markets in the Asia Pacific region.
Ingham’s also exports poultry feed and poultry ingredients. Ingham’s has invested in key
supporting capabilities including consumer insights, marketing, category management and
new product development (NPD) that will position Ingham’s to capitalise on targeted export
opportunities when they arise.
Approximately 3%
to 5% of Australia’s
annual chicken
production is
exported
Macquarie Wealth Management Inghams Group
21 December 2016 72
Board and Senior management Fig 108 Board Overview
Director Biographical information
Peter Bush
Chairman
BComm, CA
Peter had a long career in fast-moving consumer goods, holding senior roles with SC Johnson, Reckitt & Coleman, Ampol/Caltex and Arnotts and was CEO of AGB McNair and Schwarzkopf. He then ran his own strategic consultancy business for six years with clients including Qantas, Telstra, George Patterson Bates, John Singleton Advertising and McDonald’s Australia. In 2003 he became the CEO of McDonald’s Australia. Peter is Chairman of Mantra Group Holdings Limited (since 2014) and Executive Chairman of Southern Cross Media Group Limited (since 2015) and was previously Chairman of Pacific Brands Limited, Nine Entertainment Co and NEC Holdings Pty Limited, and a director of Insurance Australia Group Limited.
Mick McMahon
Chief Executive Officer
BEcon
Mick joined Ingham’s in January 2015 as Executive Chairman and was subsequently appointed CEO in February 2016. Mick has more than 30 years’ operational management experience. He is the former Managing Director, CEO and a board member of the Skilled Group. He served as COO at Coles from 2007 to 2009 and Managing Director of Coles Express from 2005 to 2009. Prior to Coles, he spent 19 years with the Shell Group both in Australia and overseas. Mick is also Chairman of Red Rock Leisure, a private Australian tourism and entertainment venue operator.
Simon Harle
Non-Executive Director
BComm, CA
Simon is a Partner of TPG based in Melbourne. Prior to joining TPG in 2006, he worked for Credit Suisse in the Investment Banking Division, where he advised on numerous Australian and New Zealand mergers, acquisitions and debt and equity financings. Prior to that, he was with Arthur Andersen Corporate Finance based in Melbourne and London, where he qualified as a chartered accountant. He has played a key role in a number of TPG investments, including Healthscope, Alinta and the recent Cushman & Wakefield transactions.
Ricky Lau
Non-Executive Director
BComm (Hons), CFA, EMBA
Ricky Lau is a Partner of TPG based in Hong Kong. Since joining TPG in 1998, Mr. Lau has played a key role in TPG’s investments in China and has served or serves on the Boards of Directors of Shenzhen Development Bank, China Grand Automotive Services Co. Ltd., Daphne International and Phoenix Satellite Television. Prior to joining TPG, he was responsible for the corporate and project finance division of Hopewell Holdings, a regional infrastructure project developer. Mr. Lau received an Executive Master of Business Administration from Kellogg-HKUST and an undergraduate degree from the University of British Columbia. Mr. Lau is also a CFA charter holder.
Linda Bardo Nicholls, AO
Non-Executive Director
BComm, BA (Econ), MBA, FCID
Linda has more than 30 years’ experience as a senior executive and director in banking, insurance and funds management in Australia, New Zealand and the United States. She is a Chairman of Japara Healthcare and a Director of Fairfax Media, Medibank Private, and the Olivia Newton John Cancer Research Institute. Linda was previously Chairman of Healthscope, Chairman of Australia Post, Chairman of Keolis Downer (trading as Yarra Trams) and a Director of Pacific Brands, Sigma Pharmaceuticals and St George Bank.
Source: Ingham’s company data, December 2016
Macquarie Wealth Management Inghams Group
21 December 2016 73
Fig 109 Senior Management Overview
Executive Biographical information
Mick McMahon
Chief Executive Officer
See Board Overview section above.
Ian Brannan
Chief Financial Officer
ACMA, MBA
Ian joined Ingham’s in May 2015 as Chief Financial Officer. Ian has 25 years’ senior management experience in public and private companies in Australia, the US and UK. He has held senior financial roles with Sara lee Bakery, Arnott’s Biscuits and Campbell Soup and most recently was CFO for GWA Group Limited and prior to that Carter Holt Harvey Building Supplies Group. Ian also serves as secretary and director on a number of Ingham’s companies.
Philip J. Wilkinson OBE
Senior Advisor
Philip joined Ingham’s as Senior Advisor in August 2015. He has more than 30 years’ experience in strategic leadership of large international agriculture businesses. He is Executive Director of the UK’s leading chicken business, 2 Sisters Food Group and the former Managing Director of Integrated Chicken at Grampian Country Food Group, also in the UK. He received an Order of the British Empire (OBE) for his services to the dairy industry in 2004 and was awarded Colonel in the USA for global services to the food industry in 2010. He is a board member of the British Poultry Council, Vice President of AVEC (the European Poultry Council), board member of Assured Food Standards (Red Tractor) and Chairman of Edinburgh based-Greengage Lighting Ltd.
Dr Beth Krushinskie
Technical Services
BSc, DVM, PhD
Beth joined Ingham’s in November 2015 as Technical Services Director. She has more than 20 years’ technical and operational experience developed in the US across food safety, animal welfare and regulatory areas, as well as poultry health, laboratory services and sales and marketing. Beth has held senior roles in technical services at Perdue Farms, Wampler Foods and Pilgrim’s Pride. She has also worked for the US Poultry & Egg Association and the US Agency for International Development. Most recently Beth was the Director of Quality Assurance & Food Safety at Mountaire Farms in Delaware.
Jonathan Hutchings
Strategy & Business Development
BEng, MBA
Jonathan joined Ingham’s in December 2014 as Strategy and Business Development Director and has 20 years’ experience in business strategy, transformation and general management in Australia, the UK, France and Asia for the FMCG and media sector. Before Ingham’s, Jonathan led Peters Ice Cream through its transformation under private equity ownership and has assisted a large number of companies in strategy development and profit improvement programs. Jonathan has been instrumental in helping to transform Ingham’s from a successful family owned company to one which is focused on performance and customer service. Jonathan also oversees procurement and Ingham’s turkey business.
Jonathan Gray
Sales and Marketing
MBA
Jonathan joined Ingham’s in 2008 as Retail Sales Manager for Ingham’s Enterprises NZ before moving into the National Sales Manager position in 2010. In October 2015, he was promoted to executive leader of the sales division based in Sydney and in February 2016 also took over the marketing division. Jonathan has extensive experience in retail sales in the UK, NZ and Australia and has held senior positions with Countdown Supermarkets and Marks and Spencer.
Mike Rozen
Primary Processing & Farming Operations
DipAg
Mike joined Ingham’s in 1992 as Plant Manager at Te Aroha, New Zealand. Mike is responsible for Ingham’s Australian primary processing and chicken farming operations. Prior to this role he was executive leader for Ingham’s poultry operations in Queensland and New South Wales (including the turkey business), following nine years as Executive General Manager of Ingham’s New Zealand operations.
Janelle Cashin
Supply Chain & Further Processing
GAICD, AssocDip AppSc, GradDip SafertySc
Janelle joined Ingham’s in 2004 following its acquisition of Chickadee Foods. Janelle has been a member of the executive leadership team since 2008 and in 2014 assumed responsibility for Ingham’s Supply Chain Division, including responsibility for inventory, warehouse facilities, planning, weigh price labelling operations and management of third party logistics providers. In April 2016, Janelle’s role expanded to include the financial and operational performance of Ingham’s further processing facilities.
Quinton Hildebrand
Operations Excellence
BSc AgEcon, MBA
Quinton joined Ingham’s in November 2015 as Operations Excellence Director. Quinton brings 23 years commercial experience in grower relations, manufacturing operations, commodity trading and marketing from South Africa, Europe and Australia. He was most recently CEO of Mackay Sugar. Quinton’s role is focused on driving commercial improvements within the operations of the Ingham’s business.
Graeme Dillon
Commercial & Trading
DipAgSci
Graeme joined Golden Poultry in 1980 – a company then jointly owned by Ingham’s and Coca-Cola Amatil as Production Manager at the Clyde feedmill. He was appointed Cardiff Mill Manager for Ingham’s in 1981, then National Stockfeed Manager in 2004. In 2011, Graeme was appointed Group Executive General Manager – Stockfeed and in 2015 named executive leader of the commercial and trading division. In this role, Graeme is responsible for raw material procurement and nutrition for Ingham’s 10 feedmills across Australia and New Zealand, external stockfeed sales, Mitavite horse feed sales and the ingredient business.
Adrian Revell
New Zealand
DipBM, NZCE
Adrian joined Ingham’s in 2002. Since June 2011 he has been executive leader of the New Zealand operations, bringing 19 years’ experience across the business including engineering and plant management expertise. Adrian is current Chairman of the New Zealand Poultry Industry Association.
Brad Moore
People & Performance
BCom, MSc
Brad joined Ingham’s in September 2015. He has more than 20 years’ experience in industrial relations, human resources and operations in the airline, resource and FMCG sectors both in Australia, New Zealand, Europe and North America. Prior to Ingham’s, Brad was Group Executive – Operations at Mirvac. Brad has brought diverse operational experience and change management expertise to Ingham’s to support its strategy and people development agenda. Brads oversees Human Resources, Industrial Relations and Labour Planning and Management and has been central to the development and implementation of the group labour strategy.
Source: Ingham’s company data, December 2016
Macquarie Wealth Management Inghams Group
21 December 2016 74
ANZ poultry industry overview
Fig 110 ANZ poultry consumption Fig 111 Poultry consumption growth in both Aus & NZ expected to moderate
Source: OECD, December 2016 Source: OECD, December 2016
Australia consumed 1,140kt of poultry in CY15, having grown at a CAGR of 4.0% over the
prior 10 years, based on OECD data. NZ consumption is 194kt, having grown at a CAGR
of 1.8% over this period. In both countries, poultry consumption has outpaced beef, pork
and lamb (the key alternative meat categories).
Fig 112 OECD expects yoy poultry growth to moderate in ANZ
Source: OECD, December 2016
The OECD anticipates ANZ poultry consumption will increase by 2.0% per annum over the
10 years to 2024 (CAGR), within this Australian poultry consumption is expected to grow at
2.0%, while NZ consumption is expected to growth at a 1.8% CAGR over the forecast
period. Growth is expected to drop from ~ 4% in 2015 and 2016f to ~2% in 2017f and
remain broadly steady over the remainder of the forecast period based on OECD
estimates.
1,144kt
194kt
0
200
400
600
800
1,000
1,200
1,400
1,600
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020f
Australia New Zealand
2015 ANZ Total: 1,339kt
kt
3.1%
4.8%
4.0%
2.0%
6.8%
5.8%
1.8% 1.8%
3.6%
4.9%
3.6%
2.0%
0%
1%
2%
3%
4%
5%
6%
7%
8%
1995 2005 2015 2024f
Australia NZ ANZ
10yr CAGR to...
4%
4%
2%2% 1%
2%
4%4%
1%1%
1%2%
4%
4%
2%1% 1%
2%
0%
1%
2%
3%
4%
5%
2015
2016f
2017f
2018f
2019f
2020f
2015
2016f
2017f
2018f
2019f
2020f
2015
2016f
2017f
2018f
2019f
2020f
Australia New Zealand Total ANZ
Australian poultry
consumption has
grown at a CAGR of
4.0% over the last
10 yrs
Australian poultry
consumption has
grown at a CAGR of
4.0% over the last
10 yrs
Macquarie Wealth Management Inghams Group
21 December 2016 75
Fig 113 Consumption Fig 114 Per capita consumption
Source: OECD, December 2016 Source: OECD, December 2016
ANZ poultry consumption is dwarfed by a range of both developed and developing
countries. However, on a per capita basis, Australia and New Zealand poultry consumption
appears relatively mature.
As a basis for comparison, US consumption of 48kg per capita (2015) compares with 42kg
per capita in Australia (12% below the US) and 38kg per capita in New Zealand (21%
below the US). On the other hand, European poultry consumption is 22.7kg/capita (40%
below NZ and 46% below Australia).
Fig 115 Australian per capita consumption Fig 116 NZ per capita consumption
Source: OECD, December 2016 Source: OECD, December 2016
Based on OECD data, Australia poultry per capita has increased at a CAGR of 2% over
the last five and 10 years. On the same basis, NZ poultry per capital consumption has
increase by 5% and 1% respectively.
Fig 117 Australian population growth was 1.4% in Dec15 quarter (vs LT average of 1.4%)
Fig 118 NZ population growth was 2% in December 2015 quarter (vs LT average of 1.2%)
Source: ABS data, December 2016 Source: Statistics NZ data, December 2016
194 529 812 1,144 1,395 1,799 1,937 1,961 2,5373,798 4,301
9,297
13,036
17,41418,166
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
NZL ISR KOR AUS CAN ARG IDN JPN IND MEX RUS BRA EU28 USA CHN
kt
1.76.6
11.6 13.6 14.2
22.726.3 26.4
34.236.5 37.8 39.4
42.0
47.6
57.7
0
10
20
30
40
50
60
70
IND IDN CHN JPN KOR EU28 MEX RUS CAN ARG NZL BRA AUS USA ISR
kg/capita
0
5
10
15
20
25
30
35
40
45
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
kg/capita
0
5
10
15
20
25
30
35
40
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
kg/capita
Macquarie Wealth Management Inghams Group
21 December 2016 76
To provide context, the Australian population growth was 1.4% in December 2015, which is
in line with the LT average. NZ population growth was 2% in December 2015, which
compares with a LT average of 1.2%. 10yr average increases in per capita consumption
suggest Poultry consumption growth of about 1-2% ahead of population growth. This
implies poultry consumption growth of 2-4%.
Poultry consumption driven by population and per capita consumption growth
Fig 119 Australia annual poultry consumption growth = growth (kg/capita + population growth)
Fig 120 New Zealand annual poultry consumption growth = growth (kg/capita + population growth)
Source: OECD and World Bank data, December 2016 Source: OECD and World Bank data, December 2016
The annual growth in poultry consumption is primarily a combination of growth in per capita
consumption and population growth. Comparing these two growth factors to the actual
growth in total annual poultry consumption results in little variance, as shown below.
If the growth of per capita poultry consumption slows there is still population growth adding
to total poultry consumption. The latest government population forecasts expect Australia
to grow at 1.7% pa from 2014 to 2018 and New Zealand to grow at 1.2% pa from 2014 to
2018.
Poultry vs. other products – Australia
Fig 121 Australian meat consumption Fig 122 Australian meat consumption growth
Source: OECD, December 2016 Source: OECD, December 2016
Poultry consumption in Australia has outpaced other meat categories. Over the 10 years to
2015 (CAGR), Poultry consumption has grown by 4.0% while Pork has grown by 2.5%,
beef has been broadly steady and Lamb consumption declined by 3.0%. Despite some
deceleration, the OECD forecasts poultry consumption will continue to outpace other meat
categories.
-10%
-5%
0%
5%
10%
15%
20%
1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015
Annual growth kg/capita Annual growth population
Annual growth actual
-20%
-10%
0%
10%
20%
30%
40%
50%
1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015
Annual growth kg/capita Annual growth population
Annual growth actual
1,144kt
781kt
622kt
202kt0
200
400
600
800
1,000
1,200
1,400
1,600
1980 1985 1990 1995 2000 2005 2010 2015 2020f
Poultry Beef Pork Lamb
kt
3.1%
4.8%
4.0%
2.0%
0.2%
1.7%
0.0%
0.8%
3.1% 3.0%2.5%
1.6%
-2.2%
-1.2%
-3.0%
-0.4%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
1995 2005 2015 2024f
Poultry Beef Pork Lamb
10yr CAGR to...
Poultry
consumption in
Australia has
outpaced other meat
categories.
Macquarie Wealth Management Inghams Group
21 December 2016 77
Fig 123 Australian meat share of plate… Fig 124 …having outpaced other categories
Source: OECD, December 2016 Source: OECD, December 2016
Total meat consumption in Australia was 2,700kt in 2015 (OECD). Chicken held the largest
share of plate with 42%, while beef and pork had 28% and 23% share of plate respectively.
Lamb share was 7%.
Fig 125 Australian meat production by volume Fig 126 Australian meat production by value
Source: ABS, December 2016 Source: ABS, December 2016
Based on ABS data, Australia produced 1,100kt of poultry in 2015, which compares with
2,500mt of Beef, 710kt of lamb and 370kt of pork. Since 1980, poultry production (by
volume) has growth by 4% per annum. Over the last five years, poultry production’s CAGR
was also 4%. By value, A$2.6bn of poultry was produced according the ABS data. This
compares to A$11.5bn worth of Beef, A$3.3bn of Lamb and A$1.1bn of pork. By value,
poultry production has grown by 6% per annum since 1980 and 8% per annum over the
last five years.
Exports likely to remain relatively modest
According to the Department of Primary Industries (DPI), very little Australian poultry meat
is exported with export volumes expected to remain around 4-5% of total production. DPI
attributed this to the lower cost base and government subsidies in other exporting
countries (especially Brazil and the USA). DPI believes that exports will comprise primarily
low-value cuts, offal and feathers for which there is little domestic demand. [Source: DPI
NSW poultry meat industry overview]
While we believe there is scope to augment low-value exports with high-end exports driven
by views around quality advantages of ANZ produce (animal welfare and provenance).
However, an export program that extends beyond a “barbell strategy” (very high and low
value poultry exports) is unlikely as major exporting countries like Brazil and the US benefit
from lower labour costs, scale advantages and government subsidies in some instances.
Poultry, 1,144kt, 42%
Beef, 781kt, 28%
Pork, 622kt, 23%
Lamb, 202kt, 7%
2.8mt meat consumed
in 2015
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Poultry Beef Pork Lamb
1,117kt
2,514kt
374kt
710kt
0
500
1,000
1,500
2,000
2,500
3,000
1980 1985 1990 1995 2000 2005 2010 2015
Poultry Beef Pork Lamb
kt
$2.6bn
$11.5bn
$1.1bn
$3.3bn
$0.0
$2.0
$4.0
$6.0
$8.0
$10.0
$12.0
$14.0
1980 1985 1990 1995 2000 2005 2010 2015
Poultry Beef Pork Lamb
$bn
Chicken held the largest share of plate
with 42% in 2015
Macquarie Wealth Management Inghams Group
21 December 2016 78
Poultry vs. other products – New Zealand
Fig 127 NZ meat consumption Fig 128 NZ meat consumption growth
Source: OECD, December 2016 Source: OECD, December 2016
While poultry remains the largest meat category in New Zealand, growth of 1.8% over the
10 years to 2015 (CAGR) was below the Pork, which grew by 2.8%. The weaker rate
reflected Chicken Consumption declines in 2005-10, a period through which pork
consumption was broadly steady. Over the 10 years to 2015 beef consumption was
broadly flat, while lamb declined by 14% (most notably during the GFC).
Fig 129 NZ volume growth driven by fresh
Source: Statistics NZ, December 2016
Growth in NZ poultry consumption has been entirely driven by the fresh category. In
contrast, the frozen poultry category has been relatively stable since 1980. Over this
period, fresh processed volumes have grown at a CAGR of 7.7%, while frozen increased
at 1.7% per year (CAGR).
Fig 130 NZ meat share of plate Fig 131 Share of plate by category
Source: OECD, December 2016 Source: OECD, December 2016
Total meat consumption in NZ was 416kt in 2015 (OECD). Chicken held the largest share
of plate with 47%, while beef and pork had 23% and 25% share of plate respectively. Lamb
share was 5%.
194kt
94kt
105kt
22kt
0
50
100
150
200
250
1980 1985 1990 1995 2000 2005 2010 2015 2020f
Poultry Beef Pork Lamb
kt
6.8%5.8%
1.8% 1.8%
0.4%
-4.5%
0.1% 0.1%
1.7%
3.1% 2.8%1.9%
-3.4%-2.3%
-13.8%
-0.4%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
1995 2005 2015 2024f
Poultry Beef Pork Lamb
10yr CAGR to...
162kt
40kt
202kt
0
50
100
150
200
250
1981 1986 1991 1996 2001 2006 2011
Processed Poultry Volumes kt
Fresh Frozen Total
Poultry, 194kt, 47%
Beef, 94kt, 23%
Pork, 105kt, 25%
Lamb, 22kt, 5%
416kt meat consumed
in 2015
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Poultry Beef Pork Lamb
While poultry is the
largest meat
category in New
Zealand
Macquarie Wealth Management Inghams Group
21 December 2016 79
What has driven growth in Poultry’s share of plate?
We highlight three key drivers of chicken’s increasing share of plate relative to other key
meat categories. This include: 1) Affordability; 2) efficiency; and 3) health & wellness
Affordability
Fig 132 Chicken relative affordability - Australia Fig 133 Supermarket prices
Source: ABS, December 2016 Source: Macquarie analysis of retail pricing, g protein/100g sourced from
Food Standards Australia New Zealand, December 2016
Chicken has experienced lower price inflation relative to competing meat categories.
Australia’s consumer price index for poultry has increased at a CAGR of 1.3% since 1981.
This compares with 2.5% for pork, 2.8% for beef and 3.2% for lamb. Since 2010, poultry
has actually decreased at a CAGR of 0.5%, compared to an increase of 0.7% for lamb,
1.7% for pork, and 3.4% for beef.
In Figure 129 above we have collated supermarket prices for a range of products within
each meat category. On average, chicken product are priced 50-60% below pork, beef and
lamb products. After adjusting for protein content (which sees beef improve its affordability
relative to pork for example), chicken remains the most affordable category.
Fig 134 Australian meat production by value per kilo
Source: ABS, December 2016
The chart above shows the value of poultry (ex broiler farm) compared to other meat
categories. Once again, the data demonstrates the relative affordability of chicken.
0%
50%
100%
150%
200%
250%
300%
350%
1980 1985 1990 1995 2000 2005 2010 2015
Poultry Pork Beef Lamb
$6.54
$13.56
$16.67
$19.16
2.9¢
6.1¢ 6.1¢
8.8¢
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
$0
$5
$10
$15
$20
$25
$30
Chicken Pork Beef Lamb
¢ / protein gram (RHS)$/kg
$2.34/kg
$4.59/kg
$3.07/kg
$4.64/kg
$0.0
$1.0
$2.0
$3.0
$4.0
$5.0
$6.0
1980 1985 1990 1995 2000 2005 2010 2015
Poultry Beef Pork Lamb
$bn
Drivers of chicken
share growth
include affordability,
efficiency and
health & wellness
Macquarie Wealth Management Inghams Group
21 December 2016 80
Fig 135 Chicken relative affordability - New Zealand Fig 136 NZ Supermarket prices
Source: NZ Stats, December 2016 Source: Macquarie analysis of Tegel retail pricing data and Food Standards Australia New Zealand data, December 2016
Similar to Australia, poultry price inflation in NZ has been lower than alternative meat
categories. NZ’s consumer price index for poultry has increased at a CAGR of 2.2% since
1981. This compares with 3.4% for pork, and 4.5% for both beef and lamb. Since 2011,
poultry has actually decreased at a CAGR of 1.8%, lamb decreased 3.4%, pork decreased
0.6% while beef increased 2.6%.
In Figure 132 above we have collated supermarket prices for a range of products within
each meat category. On average, chicken products are 17% below pork and 40-45%
below beef and lamb products. After adjusting for protein content (which sees beef improve
its affordability relative to pork for example), chicken and pork are the most affordable
categories.
Efficiency
Fig 137 Chicken requires less feed per kg of meat produced
Fig 138 Poultry production efficiency rapidly improving
Source: Review of Nutrient Efficiency in different breeds of livestock – DEFRA UK, December 2016
Source: ACMF, December 2016
In our view, the relative affordability versus other proteins is largely driven by the continual
advancement in production efficiency of poultry. A key industry measure of efficiency is the
‘feed conversion ratio’ (FCR = kg of feed required to produce a kg of meat). On this basis,
chicken compares favourably to other meat categories.
Importantly, chicken’s FCR has exhibited a steady decline. In 1975, the FCR was 2.5x, and
has declined by 28% since then. Increased sophistication with regards to genetics, feed
formulation and chicken husbandry more generally have likely driven improved FCR ratios.
0%
50%
100%
150%
200%
250%
300%
350%
400%
450%
500%
1981 1985 1988 1992 1996 2000 2003 2007 2011 2015
Poultry Pork Beef Lamb
NZ$10.96NZ$13.28
NZ$18.33 NZ$19.294.9¢ 4.9¢
8.6¢ 8.4¢
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
$0
$5
$10
$15
$20
$25
$30
$35
Poultry Pork Beef Lamb
NZ¢ / protein gram (RHS)NZ$/kg
1.6 - 1.82.3 - 2.8
5.3 - 9.5
9.2 - 13.8
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
Chicken Pork Beef Lamb
kg meat/kg feed
6457
4843 41 39 37 35 34
2.52.4
2.3 2.22.1 2.0 2.0
1.9 1.8
0.0
0.5
1.0
1.5
2.0
2.5
3.0
0
10
20
30
40
50
60
70
80
90
100
1975 1980 1985 1990 1995 2000 2005 2010 2015
Age at 2kg liveweight Feed Conversion Ratio (RHS)
Days kg feed/kg meat
Poultry price
inflation in NZ has
been lower than
alternative meat
categories
Relative affordability
versus other
proteins is largely
driven by the
continual
advancement in
production
efficiency of poultry.
Relative affordability
versus other
proteins is largely
driven by the
continual
advancement in
production
efficiency of poultry.
Macquarie Wealth Management Inghams Group
21 December 2016 81
Fig 139 Chicken has relatively high retention of energy and protein
Fig 140 …and also edible yield
Source: Marine Harvest, Global Salmon initiative, December 2016 Source: Marine Harvest, Global Salmon initiative, December 2016
While not as stark, chicken compares relatively favourably to other meat source with
regards to protein retention (21%) and edible yield (46%). We note that retention rates
refer to protein/energy of edible meat versus protein/energy in feed. Yield refers to edible
meat portion of the total body weight.
Fig 141 Feed conversion based on edible yield of animal
Note: beef has a range due to varying types of feed used
Source: Macquarie Research analysis of data from Marine Harvest, Global Salmon initiative & Review of Nutrient Efficiency in different breeds of livestock – DEFRA UK, December 2016
Given favourable yield (second to pork among meat categories) and a more favourable
FCR, it is clear that chicken has a relatively high feed efficiency even after adjusting for the
animal’s edible yield.
Health & wellness
Consumers are increasingly aware of the importance of nutrition in improving their overall
health and wellbeing. A growing focus on active lifestyles and a greater understanding of
the link between diet, exercise and health is driving strong demand for healthier products.
Poultry is generally seen as a lean and healthy protein option, which delivers consistent
quality and is therefore a beneficiary from these trends.
According to the American heart association, red meats (beef, pork and lamb) generally
have more cholesterol and saturated fat than chicken, fish and vegetable proteins such as
beans. Cholesterol and saturated fat can raise your blood cholesterol and make heart
disease worse. Chicken and fish have less saturated fat than most red meat.
10%
14%
5%
27%
21%
18%
5%
15%
0%
5%
10%
15%
20%
25%
30%
Chicken Pork Lamb Beef
Energy retention Protein retention
46%
52%
35%
41%
0%
10%
20%
30%
40%
50%
60%
Chicken Pork Lamb Beef
3.5 - 3.84.5 - 5.3
13.0 - 23.2
26.3 - 39.4
0
5
10
15
20
25
30
35
40
45
Chicken Pork Beef Lamb
x
Macquarie Wealth Management Inghams Group
21 December 2016 82
Chicken’s protein content is 6% lower than Beef, Pork and Lamb (average). However, fat
content was 51% lower. Within this, saturated fat content was 56% lower. If we exclude
lamb (which has relatively low protein and high fat), chicken has 10% lower protein
content, but 26% lower total fat content and 33% lower saturated fat content.
Fig 142 Protein content Fig 143 Fat content
Beef: stir-fry strips, separable lean, raw; Lamb: stir-fry cuts, fully-trimmed, raw; Pork: strips, as purchased, raw; Chicken, breast, lean, raw
Source: Food Standards Australia New Zealand, December 2016
Beef: stir-fry strips, separable lean, raw; Lamb: stir-fry cuts, fully-trimmed, raw; Pork: strips, as purchased, raw; Chicken, breast, lean, raw
Source: Food Standards Australia New Zealand, December 2016
Other drivers of chickens share of plate
Beyond measurable traits discussed thus far, chicken is broadly seen as a relatively
versatile and convenient meat option. Paradoxically, chicken’s versatility is a function of a
relatively bland flavour which makes it more adaptable to a variety of ingredients and
flavours. Chicken also has broader cultural acceptance relative to the other categories
(particularly Beef and Pork). Convenience is primarily driven by value-added products
which include seasoned, marinated, crumbed and battered chicken cuts (i.e. “ready to
cook”).
Provenance and animal welfare. Consumers are increasingly conscious of ensuring the
food products they consume come from known, trusted and safe sources. Furthermore,
consumers are becoming increasingly interested in the welfare of animals. Animal welfare
standards, such as those provided by the RSPCA and free range accreditation, play an
important part in communicating the standards applied during the life of the animal. In
response to consumer interest in animal welfare, the poultry industry has increased
production and promotion of higher-priced free range products for which there continues to
be strong demand.
All of Ingham’s chickens and turkeys are barn raised and cage free. All Ingham’s
Australian chicken broiler farms are accredited by the RSPCA. In addition, Ingham’s
Australian chicken broiler free range farms are also accredited by FREPA. Ingham’s New
Zealand free range chicken broiler farms are accredited by the SPCA.
In addition, the Australian and New Zealand poultry industries are subject to robust
regulation, relating to, among other things, product quality, food safety and animal welfare.
A better environmental footprint. Chicken’s carbon footprint is lower than other meat categories at 3.4kg of CO2 per kg of edible meat. Water usage (4,300 litres of water per kg of edible meat) also compares favourably to pork and beef.
22.3g
27.2g
22.4g 21.7g
0.0g
5.0g
10.0g
15.0g
20.0g
25.0g
30.0g
Chicken Beef Pork Lamb
grams / 100g serve
1.6g2.0g
2.3g
5.4g
0.5g 0.7g 0.8g
1.9g
0.0g
1.0g
2.0g
3.0g
4.0g
5.0g
6.0g
Chicken Beef Pork Lamb
Fat Saturated fat
grams / 100g serve
Macquarie Wealth Management Inghams Group
21 December 2016 83
Fig 144 Chicken has a relatively low CO2 footprint Fig 145 …and consumes less water
Source: Marine Harvest, December 2016 Source: Marine Harvest, December 2016
Australia vs. NZ – key differences
Fig 146 Australia vs. NZ chicken pricing Fig 147 Labour cost differences
Source: Macquarie Research Online shopping survey (Woolworths, Coles, New World (NZ) Countdown (NZ)), December 2016
Source: ABS, StatsNZ, Macquarie Research, December 2016
Thus far, we have discussed common drivers of poultry consumption across Australia and
New Zealand. However, it is worth highlighting one key difference, which translates to
differences in profitability of chicken production.
This is evident given Tegel’s FY16 EBITDA margin of 12.9%, versus Ingham’s at 7.3%.
While there is scope for this to narrow, factors preventing complete convergence are
higher poultry end prices and lower labour costs in New Zealand relative to Australia.
As illustrated above, we assess a variety of chicken products in both countries. On
average, NZ prices are at a 76% premium relative to Australian prices. For the economy
generally, Australian labour costs are 70% higher than NZ. However, it is worth noting that
the Australian chicken industry is a beneficiary of better scale economics relative to NZ
and is not as reliant on imported feed. These two factors provide a partial offset.
3.4
5.9
30
0
5
10
15
20
25
30
35
Chicken Pork Beef
kg CO2/kg of edible meat
4,300
6,000
15,400
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
Chicken Pork Beef
litres of water per kg of
edible meat
$9.0$8.3
$4.0 $4.0
$11.8 $12.1
$7.5 $7.2
$0
$2
$4
$6
$8
$10
$12
$14
Breast boneless Thigh cutlets Drumsticks Whole fresh roast chicken
Aus prices (A$/kg) NZ prices (A$/kg)
A$/kg
0
10
20
30
40
50
60
70
80
90
0
10
20
30
40
50
60
70
80
90
1994 1998 2002 2006 2010 2014
Australia New Zealand (in A$) New Zealand (in NZ$)
Labour costs: Australia vs New Zealand(annual average weekly full-time earnings)
$ '000 $ '000
Macquarie Wealth Management Inghams Group
21 December 2016 84
Appendix: Global poultry industry Meat category growth
The world continues to require more food and protein to feed the ever-growing population
and meet changes to consumption trends. The United Nations forecasts that the world’s
population will increase by 32% by 2050 to 9.5bn under its base case scenario, meaning
an additional 2.4bn mouths to feed. The majority of the population growth is expected in
Asia and Africa, representing 1.3bn and 0.9bn of population growth in the next 35 years.
Over this period, the world is expected to become more urbanised, increasing from the
current level of around 55% in 2015 to 66% in 2050 (UN projections). This shift in
urbanisation means that the entirety of the population growth over the forecast period adds
incrementally to urban centres.
Fig 148 World population expected to hit 9.7b by 2050…
Fig 149 …with around 66% being urbanised
Source: United Nations (Forecast beyond 2016), December 2016 Source: United Nations, December 2016
Urbanisation of population trends to have a positive impact on GDP per capita, average
household incomes and lifestyle and consumption patterns. In relation to food
consumption, urban diets tend to have a higher level of protein and fat consumption, with
these factors showing a reasonable relationship with GDP per capita.
Fig 150 Urbanisation tends to drive income, which in turn increases consumption of proteins and fats
Fig 151 Population and increased consumption per capita could see protein demand increase 65% by 2050
Source: United Nations, December 2016 Source: United Nations, December 2016
0
2
4
6
8
10
12
19
50
19
54
19
58
19
62
19
66
19
70
19
74
19
78
19
82
19
86
19
90
19
94
19
98
20
02
20
06
20
10
20
14
20
18
20
22
20
26
20
30
20
34
20
38
20
42
20
46
20
50
World population,
billions
Less developed regions More developed regions
(f)
0%
10%
20%
30%
40%
50%
60%
70%
0
1
2
3
4
5
6
7
19
50
19
55
19
60
19
65
19
70
19
75
19
80
19
85
19
90
19
95
20
00
20
05
20
10
20
15
20
20
20
25
20
30
20
35
20
40
20
45
20
50
Hu
nd
reds
Population, billions
Urban % (RHS) Urban Rural
(f)
0
20
40
60
80
100
120
140
160
180
200
0 20,000 40,000 60,000 80,000 100,000 120,000
Grams per capita per day
US$ GDP per capita
Protein consumption Fat consumption
206
339
0
50
100
150
200
250
300
350
19
70
Po
pu
lation
Co
nsu
mp
tion
20
11
Po
pu
lation
Co
ns
um
ptio
n
(40
yr
CA
GR
)
20
50
Million tonnes per annum
+65%
The world continues
to require more food
and protein to feed
the ever-growing
population
The world continues
to require more food
and protein to feed
the ever-growing
population
Macquarie Wealth Management Inghams Group
21 December 2016 85
Combining the forecast population growth and increased per capita consumption of protein
at 75% of the 40-year CAGR, implies the world needs to increase protein output by 65% by
2050.
Fig 152 Meat represents 17% of world protein consumption
Source: FAO, December 2016
Diets continue to evolve with a significant shift seen in the last fifty years to 2011. Total
protein consumption per capita has increased from around 61.5g/capita per day in 1961 to
80.5g in 2011 (last reported data, Source: FAO).
The amount of vegetal protein has increased from 41.8g to 48.7g over this period, but as a
proportion of diets this category has decreased from 45% to 40%. Correspondingly, animal
protein (ex fish and seafood) has increased from 24% to 28%.
Chicken is taking share of plate
Fig 153 Global meat consumption Fig 154 10 year growth by meat category
Source: OECD, December 2016 Source: OECD, December 2016
Poultry consumption globally has outpaced other meat categories. Over the 10 years to
2015 (CAGR), Poultry consumption has grown by 3.1% while Pork has grown by 1.8%,
lamb has increased by 1.6% and beef by 1.0%. Despite some deceleration, the OECD
forecasts poultry consumption will continue to outpace other meat categories.
0 10 20 30 40 50 60 70 80 90
1961
2011
World protein consumption g/capita/day
Cereals Starchy roots Fruit & vegetables Other vegetal
Meat Milk Other land animal Fish and seafood
While total vegetal protein consumption has increased, as a proportion of daily protein intake it has decreased from
68% to 60.5%
Animal protein share increased from 27.6%
to 33%
13%
17%
111,108kt
118,230kt
67,567kt
14,416kt
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
1995 2000 2005 2010 2015 2020
Poultry Pork Beef Lamb
kt
3.9%
3.1%
2.0%
1.0% 1.0% 1.0%
2.3%
1.8%
0.9%
1.7% 1.6%1.9%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
2005 2015 2024f
Poultry Beef Pork Lamb
10yr CAGR to...
Macquarie Wealth Management Inghams Group
21 December 2016 86
Fig 155 Global meat share of plate Fig 156 Share of plate over time
Source: OECD, December 2016 Source: OECD, December 2016
Total meat consumption in was 311mt in 2015 (OECD). Pork held the largest share of
plate with 38%, with chicken at 36%. In 2015, Beef accounted for 22% with Lamb’s share
at 4%. It is worth noting that Poultry is expected to overtake Pork as the most consumed
meat over the next 10 years.
Poultry, 111,108k, 36%
Beef, 67,567k, 22%
Pork, 118,230k, 38%
Lamb, 14,416k, 4%
311mt meat consumed in 2015
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Poultry Beef Pork Lamb
Macquarie Wealth Management Inghams Group
21 December 2016 87
Summary of Peer Companies International Poultry Companies
Fig 157 Comparison of international comparables
Ingham’s Tegel Tyson Foods chicken
segment
Pilgrim's Pride
Sanderson Farms
Scandi Standard
FY15 revenue A$2.3b NZ$484m US$41.4b / US$11.4b
Chicken
US$8.2b US$2.8b SEK5.4b
Annual production (kt) 433 80 4,100 3,500 1,500 175 Vertically integrated Yes Yes Yes Yes Yes Yes Quarantine Facility 1 0 - - - - Processing Plants 7 3 44 30 10 4 Prepared Food Plants 7 1 32 6 1 2 Breeder Farms 74 40 414 - 49 ? Hatcheries 11 3 62 40 9 2 Contract Growers 225 93 6,000+ 4,100+ 632 ? Feed Mills 10 3 32 35 8 ? Distribution Centres 9 3 12 23 11 ? Rendering 1 1 9 8 - ? Pet Food Plants - - 1 3 - 1 Employees 8,200 2,300 113,000 39,000 13,000 1,700
Source: Ingham’s company data, Public company financial statements and presentations, December 2016
Profitability
Fig 158 International comps EBITDA margins
Source: Factset, USA average comprises (Tyson Foods, Sanderson Farms & Pilgrim’s Pride), December 2016
USA producers have shown greater margin volatility than European peers.
The USA poultry industry has been impacted by Avian Influenza and high commodity
prices at different times over the last decade. The USA exported around 20% of total
domestic production in 2015 and during Avian Influenza outbreaks, most export markets
are closed, resulting in significant disruption to domestic poultry producers.
Poultry producers typically have benefitted from the decline in commodity prices since
2012 with USA poultry margins currently at record highs. Commentary suggests US poultry
producers sell at short term or spot pricing which would allow for faster transfer of feed
costs into pricing, as opposed to Ingham’s and Tegel which use hedging and longer term
contracts to smooth out commodity price volatility. We understand Ingham’s is trying to
introduce feed pass through clauses into some of its contracts.
Ingham’s operates in Australia and New Zealand which are lower risk for outbreaks of
Avian Influenza and other avian diseases.
-5%
0%
5%
10%
15%
20%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
USA Europe (LDC SA) NZ (Tegel) Australia (Ingham's)
Macquarie Wealth Management Inghams Group
21 December 2016 88
International Poultry Industry
Industry characteristics and trends across the USA and European poultry markets typically
share many similarities to Australia and New Zealand poultry markets.
Large poultry producers are vertically integrated, controlling the entire process
from feed milling through to distribution except for the growing stage, which poultry
producers typically contract out.
One to two large poultry producers with significant market share typically
dominate each poultry market. These large scale producers generate significant
proportions of their revenue from key retailers, which creates key customer risks but
also makes it difficult for a retailer to quickly change suppliers. (e.g. Wal-Mart
accounted for 17% of Tyson’s FY15 revenue of US$41b).
Many international poultry producers have made acquisitions to consolidate the
industry and to access other markets while more recent acquisitions appear to be
aimed at entering or expanding capability into higher margin value-added and
processed foods segments. Tyson Foods acquired The Hillshire Brands Company in
2014, a manufacturer and retail marketer of packages and prepared foods for ~US$8b;
and Scandi Standard acquired organic chicken producer Bosarpkyckling also in 2014.
Commentary suggests that international producers often don’t have feed cost pass
through mechanisms in supply contracts, but instead rely upon regular contract pricing
negotiations.
Most poultry producers are:
Centralising facilities and expanding operation size, with ongoing investment in further
automation and efficiency projects
Continuing to use develop improved genetics and nutritional feed blends to improve
efficiency and lower the feed conversion ratio
Increasing new product innovation, particularly into the value added and further
processed categories, to drive additional sales in higher margin categories
Offering healthier, ethically approved chicken which includes products such as free
range, organic, and antibiotic free chicken. Large QSR’s in the USA including
McDonald’s, Chipotle Mexican Grill, and Subway have recently announced plans of
varying degrees to move away from animals fed with antibiotics
Trying to increase the volume of own branded product sales
Key Differences on Biosecurity
The European and United States markets are typically free to import and export poultry.
Due to low production costs in the US (scale, R&D, and labour costs), imported poultry
volumes are negligible and accounted for around 0.3% of domestic poultry consumption in
2006 to 2012.
Australia and New Zealand have strict protocols in place for the importation of chicken
meat that limits competition from international imports, particularly in fresh poultry that
accounts for the majority of the Australian and New Zealand markets.
Large poultry
producers are
vertically integrated
Large poultry
producers are
vertically integrated
One to two large
poultry producers
with significant
market share
typically dominate
each poultry market.
One to two large
poultry producers
with significant
market share
typically dominate
each poultry market.
Macquarie Wealth Management Inghams Group
21 December 2016 89
Fig 159 Capex/Sales for international comps Fig 160 US poultry producers Capex/Sales shows periods of increased investment
Source: Factset, December 2016 Source: Factset, December 2016
The long run average capex/sales for poultry producers is usually between 2% to 4% with
spikes during periods of significant investment. Tegel’s average capex/sales rate over the
past four years was 5.5% following upgrades to its processes and facilities.
Figure 156 shows US poultry producer Sanderson Farms’ increased capex after building
new poultry production complexes in 2005, 2007, 2010 and 2014. It is likely the other
producers have expanded at a slower rate or executed a more progressive approach to
adding capacity with smaller spikes in capex.
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
USA Average LDC (France) Tegel
0%
2%
4%
6%
8%
10%
12%
14%
Tyson Sandersons Pilgrim's Hormel
Macquarie Wealth Management Inghams Group
21 December 2016 90
New Zealand
Tegel (TGH: NZSE)
Tegel is New Zealand’s largest poultry producer. It processed 80,000 tonnes of poultry in
FY15 generating sales of NZ$484m and has an estimated market share of around 48%.
Domestic sales accounted for 84% of total sales in FY2015 while its growing export
business made up the remaining 14%. Tegel began operations in 1961 and listed on the
New Zealand stock exchange in 2016.
Fig 161 Tegel’s operations
Source: Tegel company data, December 2016
Tegel has three full vertically integrated production operations located in Auckland, New
Plymouth and Christchurch that allows the business to service the three main population
centres. Each region has ~25m birds per annum production capacity and contain a
hatchery, a feedmill, breeder farms, grower farms, a processing facility and a distribution
centre that can operate independently and can provide flexibility in case of any disruption
to a region.
Fig 162 TGH (NZ) vs S&P NZX
Source: Factset, December 2016
60%
70%
80%
90%
100%
110%
120%
May-16 Jul-16 Sep-16 Nov-16
TGH (NZ) S&P/NZX All
Tegel is New
Zealand’s largest
poultry producer
Tegel is New
Zealand’s largest
poultry producer
Macquarie Wealth Management Inghams Group
21 December 2016 91
Fig 163 Tegel revenue profile Fig 164 Tegel delivered strong uplift in FY16 margins
Source: Tegel Company data, December 2016 Source: Tegel Company data and Prospectus forecast, December 2016
Operations
Tegel reported revenue growth of 8.9% and 3.4% in FY15 and FY16 respectively with
EBITDA margins rising to 10.8% and 12.9% in the same periods. Tegel attributed the
improved margin performance to its business investment program and improved volumes
however lower feed costs also likely helped improve margins.
From FY13 to FY16 Tegel has invested over $70m in growth and productivity capital
expenditure across its integrated supply chain and processing facilities, as noted in Tegel’s
prospective financial information.
Tegel’s Product Disclosure Statement (PDS, March 2016) defines its growth strategy:
New product development and initiatives aimed at growing the overall volume and
value of poultry consumption;
Increased production of value added products to deliver solutions for evolving
consumer preferences;
Expanding into new channels, growing volumes and expanding the product range to
new and existing export customers; and
Identifying and entering new and growing export markets with a five year target for
exports to generate 25% of total revenue, compared to ~18% in FY16.
Brand refresh is currently underway aiming to increase consumers’ preference for
Tegel’s products and increase domestic poultry consumption, particularly in newly
developed products. The estimated cost of the refresh is ~NZ$5m and it was 12 years
since Tegel’s last major refresh.
1H17 Results Update
Tegel last week reported 1H17 results with total poultry volumes +6.9% and revenue up
4% on pcp. Within this domestic poultry volumes were +8.4% on pcp and export volumes
flat on pcp.
Whilst volumes and sales were strong, against a backdrop of soft domestic pricing,
underlying EBITDA was down 4% vs pcp to NZ$35.1m. Tegel noted that soft domestic
pricing has continued for longer than anticipated due to excess volumes in the market.
However in the longer term, Tegel expects that the domestic (NZ) market will return to
more rational volume levels. Indeed Tegel’s 1H17 results presentation noted an anticipated
pricing improvement in 2H due to “better market conditions”. Higher inter-island freight
costs due to the Kaikoura earthquake are a negative factor in 2H whilst 2H receives a full
six month positive impact of new contracts won in 1H17.
355 367 396 408 442
6387
88102
10567
6379
7278
0
100
200
300
400
500
600
700
FY13(a) FY14(a) FY15(a) FY16(a) FY17(e)
Domestic poulty Export poulty Other revenue
485
582563
517
$NZm
625
51.0 52.2
61.0
74.9
84.0
10.7%10.1%
10.8%
12.9%
13.4%
6%
8%
10%
12%
14%
16%
18%
0
10
20
30
40
50
60
70
80
90
FY13(a) FY14(a) FY15(a) FY16(a) FY17(e)
EBITDA margin
NZ$m
Tegel reported
revenue growth of
8.9% and 3.4% in
FY15 and FY16
respectively with
EBITDA margins
rising to 10.8% and
12.9% in the same
period
Tegel reported
revenue growth of
8.9% and 3.4% in
FY15 and FY16
respectively with
EBITDA margins
rising to 10.8% and
12.9% in the same
period
Macquarie Wealth Management Inghams Group
21 December 2016 92
Based on the current market conditions impacting FY17, underlying EBITDA is expected to
be between $75m and $85m, with NPAT between $33m and $41m. This compares to
Tegel’s PDS forecast in FY17 of $87m EBITDA (proforma, 53 weeks) and NPAT of $45.6m
(proforma, 53 weeks).
We note that proforma EBITDA was $74.7m in FY16 (52 weeks) and NPAT $36.8m.
Hence at the lower end of revised EBITDA guidance, FY17 would be flat on pcp whilst an
outcome at the mid-point of Tegel’s FY17 NPAT guidance would be similar to pcp. We
note Ingham’s New Zealand segment revenue is expected to be up 1% in NZ terms and
flattish in EBITDA terms vs pcp.
Tegel also noted the recent announcement permitting a wider range of products to be
exported to Australia will allow the company to accelerate export sales over the next few
years. Growth will be achieved through a considered approach with respect to identifying
product gaps and sustainability of margins. Tegel anticipates its first raw poultry sales into
Australia in the second half of this financial year.
Fig 165 Tegel FY15 revenue by product category Fig 166 Tegel FY15 revenue channels
Source: Tegel Company data, December 2016 Source:, Tegel Company data, December 2016
Products
Fresh poultry is Tegel’s core product and generated 42% of group sales in FY15 however
its value-added poultry range is growing and accounted for 37% of FY15 sales. Tegel’s
PDS forecasts further growth in value-added products capitalising on consumers who are
more health-conscious with busy lifestyles that make convenient, nutritious meals
desirable.
Domestic Market
NZ retail is Tegel’s primary distribution channel and generated 42% of FY15 revenues,
followed by NZ food service (20%), NZ QSR (8%) and NZ other (14%).
Tegel sells its products through a combination of supply contracts with its customers and
supply based on purchase orders placed by customers as and when they require product.
Tegel generates approximately 40-50% of total domestic poultry and smallgoods sales
from contracted supply (Tegel PDS).
Export Markets
Tegel generated 16% of FY15 sales through its export markets with Australia accounting
for around 60% of export volume. The export markets of Papua New Guinea, Fiji and
Vanuatu generate around 30% of volumes and Tegel has recently started sales into Hong
Kong and the United Arab Emirates. Additionally, Tegel is exploring opportunities to export
into the Philippines, Japan, Singapore, South Korea, Taiwan and Bahrain.
Fresh42%
Value Added37%
Frozen12%
Smallgoods5%
Other Poultry4%
NZ Retail42%
NZ Food Service
20%
NZ QSR8%
NZ Other14%
Australia13%
Other Export3%
Tegel generated
16% of FY15 sales
through its export
markets with
Australia
accounting for
around 60% of
export volume
Macquarie Wealth Management Inghams Group
21 December 2016 93
Recently announced changes now allow fresh poultry to be imported into Australia from
New Zealand only. This is the first time fresh poultry has been approved for import and
requires a valid import permit and compliance with an extensive list of requirements. The
potential increase in export poultry volumes from NZ to Australia due to this change is
unknown. We note that retail poultry prices are significantly higher in NZ (around 40% to
90% for fresh poultry depending on cut), shipping is a further additional cost, and the
additional days in transit may make fresh poultry unsuitable to export from NZ to Australia.
Fig 167 Feed is the largest component of Tegel's COGS
Fig 168 Tegel has a track record of effective feed cost management
Source: Tegel FY15 company data, December 2016 Source: Tegel Company data, December 2016
Input costs
Tegel’s largest input costs are raw materials that make up chicken feed (typically corn,
wheat, soy and barley). Tegel notes that it typically secures its input costs for ~12 months
in advance by hedging its exposure to US$ exposed commodities and foreign exchange
risks which allow it to effectively manage input prices for up to two years in advance at
fixed prices. This strategy has been successful with feed costs as a percentage of revenue
from FY10 to FY16 kept within a range of 22.6% to 24.6%.
Tegel sources feed from both domestic and international suppliers to procure the lowest
cost ingredients available. Tegel is able to alter its feed ratio and substitute amongst the
different grains to reflect any changes in the availability and pricing of the ingredients.
Additionally, Tegel’s feed mills have storage capacity for approximately four months of raw
ingredient requirements at current production levels.
Europe
The European poultry industries are typically more competitive due to European Union
trade laws which make importing and exporting poultry between the EU countries easier
and often with no tariffs imposed. Scandi Standard (SCST: ST) and LDC SA (LOUP: PA)
benefit from scale as the largest poultry producers in their respective markets and have
EBITDA margins of around 9% and 7% respectively.
Scandi Standard (SCST: ST)
Overview
Scandi Standard is Scandinavia’s largest poultry producer with operations in Denmark,
Sweden, Norway and a smaller Finish operation acquired in 2015. The company is
vertically integrated and owns its own hatchery that supplies stock to contracted breeders.
The company listed on the NASDAQ OMX Stockholm in 2014.
Feed32%
Manufacturing labour
24%
Other growing22%
Other direct22%
23.6% 23.1%22.7%
22.6%
24.6%
23.8%
16%
18%
20%
22%
24%
26%
28%
30%
$0
$100
$200
$300
$400
$500
$600
FY10 FY11 FY12 FY13 FY14 FY15
Revenue Feed Costs Feed Costs as % of Revenue
NZ$m
Recently announced
changes now allow
fresh poultry to be
imported into
Australia from New
Zealand only.
Recently announced
changes now allow
fresh poultry to be
imported into
Australia from New
Zealand only.
The European
poultry industries
are typically more
competitive due to
European Union
trade laws
Macquarie Wealth Management Inghams Group
21 December 2016 94
Fig 169 SCST (OME) vs FTSE World Europe
Source: Factset, December 2016
Scandi Standard produced around 174kt of poultry products in FY15 worth SEK5.4b
(~A$850m) and had an estimated market share for poultry of ~46% in Sweden, ~25% in
Norway, and ~40% in Denmark. Scandi notes that the Nordic market for poultry products
has grown around 4% (CAGR) over the last decade with the trend expected to continue, as
the per capita consumption of chicken in the Nordic region is significantly lower than in
other parts of Europe and the developed world.
Fig 170 Scandi Standard’s FY15 product mix Fig 171 Despite being a key player, margins are relatively low and highlight EU import competition
Source: Scandi company data, December 2016 Source: Scandi Standard company data, December 2016
Operations & Customers
Scandi’s FY15 results were impacted by the loss of a major contract in Norway and a drop
in market demand following extensive media coverage regarding bacteria in chicken,
according to the company. Sweden and Denmark increased operating income 41% and
38% to SEK160m and SEK144m respectively, while Norway declined 50% to SEK60m.
Scandi’s goal is to exceed a 10%+ EBITDA margin over the medium term.
Competition from other imports has increased in Sweden and Denmark while Norway
currently has restrictive quotas in place that provide more protection. Changes to these
different laws and regulations could have a large impact on Scandi’s operating results.
Poultry producer concentration seems to be similar to ANZ, with a few large leading
players in each market and numerous smaller businesses making the rest of the market:
-%
20%
40%
60%
80%
100%
120%
140%
160%
Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Feb-16 Jun-16
SCST (OME) FTSE World Europe
Frozen 45%
Fresh/Chilled43%
Egg6%
Other6%
5,202 5,2675,423
479 472 450
9.2%9.0%
8.3%
0%
2%
4%
6%
8%
10%
12%
14%
0
1,000
2,000
3,000
4,000
5,000
6,000
2013 2014 2015
Sales EBITDA margin
KRm
Macquarie Wealth Management Inghams Group
21 December 2016 95
Sweden: Scandi has ~45% market share with 2 large operators (Guldfageln &
Familjen Lagerbergs Kyckling) also supplying the market, as well as several smaller
and typically family run businesses.
Denmark: Scandi has ~42% market share and the market is futher supplied by two
relatively large competitors Rose Poultry & A Frost.
Norway: Scandi has ~22% market share behind 2 larger operators Nortura with ~45%
and Rema with ~29% market share.
Retailer concentration is high in Scandinavia, with the top four retailers accounting for 94%
of the Swedish market, the top two holding 70% of the Danish market, while the top four
control 96% of the Norwegian market.
The company notes it has limited contractual possibilities to pass feed price increases on
to its customers, with changes needing to be separately discussed and negotiated.
Products
Scandi continues to develop and release new products such as free-range chicken, ready
to cook and eat products, and various other processed foods. The Group has a product
development plan covering the next 18-36 months with major releases two to three times
per year in each country.
Scandi Standard estimates that fresh chilled products comprise around 75-80% of the
Danish and Norwegian retail markets while in Sweden frozen chicken dominates and
accounts for around 63% of sales. According to the company, the long-term trend is
towards an increasing demand for chilled products, which are gaining market share from
frozen products.
Own brand sales and private label sales were around 56% which is significantly higher
than Australia, while private label made up a smaller 39% of total sales in 2015,.
Acquisitions
Since listing Scandi Standard has made a few targeted acquisitions including:
Bosarpkyckling (Sweden, 2014) is the leading producer of organic chicken in Sweden
and will help increase penetration into the premium segment. At the time of
acquisition Bosarpkyckling reported growth of 12% CAGR since 2010.
Huttulan (Finland, 2015) is small chicken producer operating in Finland that is currently
processing around 1.4m chickens per annum, but reportedly had capacity for up to
10m. Scandi entered Finland as it has similar market characteristics to its existing
operations.
L.D.C. S.A. (LOUP: PA)
Overview
LDC is a poultry producer but also produces a small amount of pork, cattle and rabbit. It
operates through its poultry and catering divisions and operates in every large French
poultry production region including Burgundy, Brittany, Normandy and Aquitaine. The
group has grown via numerous acquisitions of production facilities and existing brands.
LDC was founded in 1968 and is listed on the Euronext NV, although it is largely owned by
five families with free float around 16%.
Macquarie Wealth Management Inghams Group
21 December 2016 96
Fig 172 LOUP (PAR) vs FTSE World Europe
Source: Factset, December 2016
LDC produced around 680kt of poultry products in FY15 worth €2.7m. According to LDC,
its French poultry division has been successful in developing its large national brands while
acquiring regional labels with strong brand power and good reputations to cater to the
French market. The convenience division offers a wide range of processed products such
as ready meals, pizzas, pancakes and sandwiches.
Fig 173 Poultry generates ~83% of LDC’s group sales Fig 174 LDC’s poultry segment has delivered solid growth and stable margins for ~10 years (note: Feb year end, have used FY16 as comparable FY15)
Source: LDC company data, December 2016 Source: Factset, December 2016
LDC announced an alliance with agricultural group Sofiproteol in 2014 to provide it with
access to feed production facilities and poultry production sites. LDC also acquired the
processed product manufacturer AGRIAL in 2015 which included two processing facilities
and a distribution business. AGRIAL had revenues of around €85m for FY15.
-%
50%
100%
150%
200%
250%
300%
350%
400%
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
LOUP (PAR) FTSE World Europe
Poultry76%
Catering/Smallgoods
17%
International Poultry
7%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
0
500
1,000
1,500
2,000
2,500
3,000
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Sales EBITDA margin
€m
Macquarie Wealth Management Inghams Group
21 December 2016 97
North & South America
Summary
The United States is the largest poultry producer and consumer in the world and produced
over 18,00kt of poultry in 2015. The US poultry industry is highly efficient and US imports
are negligible, accounting for around 0.3% of domestic consumption of poultry meat in
2006 to 2012. The efficiency and scale of the US industry make it difficult for foreign
exports to compete in the US.
Fig 175 US poultry consumption volumes
Source: USDA data, OECD data, December 2016
In 2012, US exports accounted for 34% of global broiler meat and turkey meat exports by
volume. Mexico, Canada, China/Hong Kong and Russia accounted for an average of 63%
of all US exports by volume in 2006 to 2012. However, the global export market has
become increasingly competitive. Brazil, which has become a highly efficient producer over
time, was the world’s largest poultry exporter for most of 2006 to 2012. Other major global
poultry exporters include the European Union, Thailand and China while Russia, Saudi
Arabia, Mexico and Japan are the world’s largest poultry net importers.
Fig 176 EBITDA margins similar across producers but impacted primarily by Avian Influenza and feed costs
Source: Macquarie analysis of Factset data (US Chicago Corn price index and company margins), Sanderson Farms presentation, December 2016
The USA poultry industry was affected by Avian Influenza and high commodity prices at
different times over the last decade. The USA currently exports around 20% of total
production and during Avian Influenza outbreaks most export markets are closed.
15
20
25
30
35
40
45
50
55
60
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
US poultry consumption US poultry consumption (kg/capita)
kt kg/capita
1.9 2.0 2.2 2.3 2.5 2.0 2.5 3.5 4.9 3.5 4.0 6.6 6.9 5.9 4.0 3.7$0
$2
$4
$6
$8
$10
$12
$14
$16
$18
$20
-15%
-10%
-5%
0%
5%
10%
15%
20%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
US Corn Price - yearly average (US$/bushel) Tyson foods - Poultry
Sanderson Farms Pilgrim's Pride
Average of Tyson, Sanderson & Pilgrim's Pride
Avian Influenza
Drought induced high grain prices, chicken oversupply
$8 corn, recession
The efficiency and
scale of the US
industry make it
difficult for foreign
exports to compete
in the US.
The efficiency and
scale of the US
industry make it
difficult for foreign
exports to compete
in the US.
US exports
accounted for 34%
of global broiler
meat and turkey
meat exports by
volume
US exports
accounted for 34%
of global broiler
meat and turkey
meat exports by
volume
Macquarie Wealth Management Inghams Group
21 December 2016 98
Tyson Foods (TSN: NYSE)
Overview
Tyson Foods is the largest US poultry producer and operates a vertically integrated
chicken production process including breeding stock, contract growers, feed production,
processing, further-processing, marketing and transportation. Tyson also owns Cobb-
Vantress, Inc. (Cobb), one of the leading global poultry breeding stock suppliers. Tyson
Foods was incorporated in 1947 as Tyson’s Feed and Hatchery.
Fig 177 TSN (US) vs S&P500
Source: Factset, December 2016
Tyson reported group sales of US$40.6b in FY15. The poultry segment processed around
4,000kt of poultry in FY15, which is an average of 35m chickens per week through its 44
processing facilities and generated US$11b of sales (~27% of group).
Tyson notes its aim is to transition from a pure protein producer with one brand to a
consumer focused packaged goods company with multiple brands. Tyson acquired
Hillshire Brands, a manufacturer and retail marketer of packaged meat and prepared
foods, in 2014. Tyson generated 12.5% of FY15 sales from products created in the
previous three years and expects further growth from its product development program.
Fig 178 Poultry accounts for ~27% group sales... Fig 179 ...and is delivering strong results aided by falling feed prices in the US
Source: Tyson company data, December 2016 Source: Factset, December 2016
-%
50%
100%
150%
200%
250%
300%
350%
400%
450%
500%
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
TSN (US) S&P 500
Chicken27%
Beef41%
Pork11%
Processed Foods
19%
Other2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Group Sales EBITDA
Group EBITDA margin Chicken Segment EBITDA margin
US$m
Macquarie Wealth Management Inghams Group
21 December 2016 99
Operations & Customers
Tyson does not produce all of its poultry requirements and buys in the open market to
optimise their value added and processed volumes. Tyson estimates if it produced its
entire FY15 poultry requirements they would have ended up with an additional 4 million
pounds (1.8m kg) of leg quarters per week to sell.
Tyson’s poultry segment has reported solid results since 2012 with falling commodity
prices translating into substantially lower feed costs, which account for ~64% of their cost
to grow a chicken. Lower feed costs provided a direct benefit to the poultry segment of
~US$600m in FY14 and ~US$450m in FY15 respectively and the company expects a
further ~$100m benefit in FY16. Poultry segment EBITDA margins increased from 7.6% in
FY13 to 10.2% in FY14 and 14.4% in FY15 and are significantly above Tyson’s average of
~7% over the past ten years.
Tyson notes that is uses a variety of different pricing models for their supply contracts,
some with guaranteed volume and they look at pricing every 30, 60 or 90 days. Because
many of its sales contracts are formula based or shorter-term in nature, they are
typically able to offset rising input costs through pricing, however, there is a lag time
for price increases to take effect.
Acquisitions
In 2014, Tyson acquired Hillshire Brands – a manufacturer and retail marketer of packaged meat and prepared foods – for ~US$8b, which was a 70% premium to its closing price following a bidding war with JBS. Tyson expects synergies of US$300m and paid a 16.7x trailing 12 months adjusted EBITDA multiple or ~10.5x including synergies.
Pilgrim’s Pride (PPC: NASDAQ)
Overview
Pilgrim’s Pride Corporation (PPC) is the second largest US poultry producer and is
primarily engaged in the production, processing, marketing and distribution of fresh, frozen
and value-added chicken products to retailers, distributors and foodservice operators. JBS
S.A. owns ~77% of the company. PPC started in 1946 as a retail feed store and was
incorporated in Texas in 1968 and reincorporated in Delaware in 1986.
Fig 180 PPC (US) vs S&P500
Source: Factset, December 2016
PPC produced around 3,500kt of poultry in FY15 generating sales of US$8.2b. It has
grown by numerous acquisitions to become a vertically integrated poultry producer
operating in 12 US States, Puerto Rico and Mexico. PPC acquired Tyson Food’s poultry
operations in Mexico during 2015 for around US$400m. Exports accounted for around 5%
of FY15 chicken sales.
-%
100%
200%
300%
400%
500%
600%
700%
800%
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
PPC (US) S&P 500
Macquarie Wealth Management Inghams Group
21 December 2016 100
Fig 181 Fresh chicken accounts for ~70% of Pilgrim’s Pride FY15 sales
Fig 182 Pilgrim's Pride operating performance
Source: PPC company data, December 2016 Source: Factset, December 2016
Operations & Customers
PPC’s recent results have benefitted from falling commodity prices. Global corn stocks and
soybean inventories remain at high levels, with corn and soybean meal accounting for
approximately 46% and 35% of PPC’s total feed costs in 2015.
PPC has invested over US$1b in its business over the past 5 years to FY15 with plans for
an additional $190m investment during FY16.
Products
PPC are pushing into the antibiotic free chicken and other products, including a planned
near-term entry into organic chicken. Management note this represents an effort to better
resonate with new consumer trends for more natural products while adding further value to
their portfolio.
PPC notes that the jumbo bird (>7.75lbs) that is used predominately in the retail grocery
and food service industries continues to gain share in its markets.
Acquisitions
PPC acquired Tyson Food’s poultry operations in Mexico during 2015 for around
US$400m with the business expected to generate sales of around US$500m per year.
Fresh Chicken70%
Prepared Chicken
25%
Export & Other Chicken
5%
-5%
0%
5%
10%
15%
20%
25%
30%
-1,000
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Sales EBITDA Margin
US$m
Macquarie Wealth Management Inghams Group
21 December 2016 101
Sanderson Farms (SAFM: NASDAQ)
Overview
Sanderson Farms is the third largest US poultry producer and is engaged in the
production, processing, marketing and distribution of fresh and frozen chicken and other
prepared food items. Sanderson Farms was founded in 1947 and completed an initial
public offering in 1987.
Fig 183 SAFM (US) vs S&P500
Source: Factset, December 2016
Sanderson Farms produced around 1,500kt of poultry in FY15 generating sales of
US$2.8b. Export markets generated around 7% of Sanderson’s FY15 gross sales with
Mexico, China and Central Asia the largest customers.
Fig 184 Value added products accounted for 92% of Sanderson Farms’ FY15 net sales
Fig 185 Sanderson Farms operating performance
Source: Sanderson Farms company data, December 2016 Source: Factset, December 2016
Operations & Customers
Sanderson Farms noted that its export markets were disrupted during FY15 by a number
of factors including avian influenza-related bans, a strong US dollar and international
political issues. Total US industry volume through October 2015 was lower by 15%
compared with 2014.
-%
200%
400%
600%
800%
1000%
1200%
1400%
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
SAFM (US) S&P 500
Value Added92%
Non-Value Added
1%
Prepared Chicken
7%
-5%
0%
5%
10%
15%
20%
25%
30%
-500
0
500
1,000
1,500
2,000
2,500
3,000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Sales EBITDA Margin
US$m
Macquarie Wealth Management Inghams Group
21 December 2016 102
Sanderson opened a new poultry-processing complex in 2015 with capacity for 1.25m
chickens per week aimed at the big bird deboning market. The facility is currently operating
at ~50% capacity but is expected to ramp up to full capacity by the end of FY16.
Sanderson has also announced the selection of its next poultry complex site in North
Carolina with a further capacity for 1.25m chickens per week aimed at the big bird
deboning market. Sanderson Farms also built three major poultry processing facilities in
2005, 2007 and 2010.
The company changed its marketing strategy in 1997 to move away from the small bird
markets serving primarily the fast food industry to concentrate its production on the retail
and big bird deboning markets serving the retail grocery and food service industries. This
market shift resulted in larger average bird weights of the chickens processed by the
company (Fig 182 below).
Products
We note that Sanderson Farms’ definition of value added appears to be different to other
producers and it considers products “value added” by performing one or more processing
steps beyond the stage where the whole chicken is first saleable as a finished product.
However, the majority of its products are pre-packaged pieces of fresh chicken that align
more closely with the fresh poultry classification of other producers.
Average sale prices for poultry products decreased 11% in FY15 compared to FY14,
however this was offset by feed costs that were 16% lower than FY14. US farmers
produced good crops of corn and soybeans in 2015 and Sanderson Farms expect feed
costs in FY16 should be similar, if not slightly lower, than FY15.
Acquisitions
The company aims to have prepared foods sales account for ~10% of total sales (7% in
FY15) and the company states it may look to acquire additional businesses in the future to
bring this segments’ contribution back toward the target value.
Fig 186 The jumbo size bird is gaining market share.. Fig 187 ..and Sanderson Farms targets this market
Source: Pilgrim’s Pride investor presentation, December 2016 Source: Sanderson Farms investor presentation, December 2016
23% 24% 27% 26% 25% 26%
43% 41% 35% 35%32% 30%
19% 19% 19% 19%21% 22%
15% 16% 18% 19% 22% 22%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2011 2012 2013 2014 2015 2016
<1.9kg 1.9-2.8kg 2.8-3.5kg >3.5kg
2.6 2.6
3.6
2.7
2.3
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Tyson Foods Pilgrim's Pride Sanderson Farms
Perdue Foods Koch Foods
Average live weight (kg)
kg
Macquarie Wealth Management Inghams Group
21 December 2016 103
Hormel Foods (HRL: NYSE)
Hormel Foods operates through five segments: Grocery Products, Refrigerated Goods,
Jennie-O Turkey Store, Specialty Foods, and International & Other. Hormel acquired
Jennie-O Foods, the largest privately owned US turkey producer at the time, in 1986 and
since then has completed numerous acquisitions. Hormel Foods was founded by George
A. Hormel in 1891 as Geo. A. Hormel & Co in Austin, Minnesota.
Fig 188 HRL (US) vs S&P500
Source: Factset, December 2016
Hormel’s turkey segment generated US$1.6b sales in FY15 (~18% of group sales) and
US$0.28b EBIT (~25% group EBIT). It is one of the largest turkey processors and
marketers in the world with over 1,500 products distributed across more than 20 countries.
Fig 189 Hormel’s Turkey segment accounted for ~18% of FY15 Group sales but ~25% of operating income
Fig 190 The Turkey segment results are more volatile than overall group margins
Source: Hormel company data, December 2016 Source: Factset, December 2016
Operations & Customers
Highly pathogenic avian influenza affected the back half of FY15 with around 20% of
Hormel’s turkey supply chain lost following the outbreak. Flocks lost earlier in the year
created large volume shortfalls in operations and sales. 4Q15 turkey sales and operating
income were down 18% and 23% respectively on pcp. Hormel expects 1H16 results will be
impacted while the supply chain is rebuilt but management expect results to normalise in
2H16.
-%
200%
400%
600%
800%
1000%
1200%
1400%
1600%
1800%
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
HRL (US) S&P 500
Turkey18%
Refrigerated Products
47%
Grocery Products
17%
Specialty Foods
12%
International & Other
6%
0%
5%
10%
15%
20%
25%
30%
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Group Sales EBITDA
Group EBITDA margin Turkey Segment EBITDA margin
US$m
Macquarie Wealth Management Inghams Group
21 December 2016 104
Hormel specialises in value added products and part of its strategy is on further product
innovation. The turkey segment has delivered strong margins and consistent profitability
when compared to the other US poultry producers over the same period.
JBS S.A. (JBSS3: BSP)
Overview
JBS SA is the largest protein processor and one of the largest global food companies and
operates out of Brazil. The company processes beef, pork, lamb, chicken and also
produces value added and convenience food products. JBS has more than 200 production
facilities worldwide across all divisions and has the capacity to process more than 14
million poultry birds per day.
Fig 191 JBS SA (BR) vs FTSE Brazil
Source: Factset, December 2016
JBS completed an initial public offering in 2007 and entered the poultry industry in 2009
with the acquisition of the predominately US-based Pilgrim’s Pride. JBS further expanded
its poultry operations in 2013 with the acquisition of Seara and rental of Tramonto
Alimentos’ poultry assets and entered Europe in 2015 with the acquisition of Moy Park,
one of Europe’s leading prepared foods and poultry producers. The recent acquisitions are
progressing JBS from a pure protein producer towards its goal of producing a larger
volume of value added products under brand names.
Fig 192 Poultry accounted for ~22% of FY15 sales Fig 193 JBS operating results 2010 - 2015
Source: JBS company data, December 2016 Source: Factset (no chicken segment data available for 2012/13),
December 2016
-%
50%
100%
150%
200%
250%
Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16
JBS SA FTSE Brazil
Poultry22%
Beef32%
Pork16%
Prepared & Other
30%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
2010 2011 2012 2013 2014 2015
Group Sales Group EBITDA
Group EBITDA margin Chicken segment EBITDA margin
R$m
Macquarie Wealth Management Inghams Group
21 December 2016 105
Animal Feed Producers
Ridley (ASX: RIC)
Overview
Ridley Corp. Ltd. produces and markets stock feed and animal feed supplements. The
company also engages in the production of crude salt, salt refining and marketing. The
AgriProducts segment is a supplier of premium quality, high performance animal nutrition
solutions for most production animals including poultry, pigs, cattle and aquaculture. The
company was founded in 1987 and is headquartered in Melbourne, Australia.
Fig 194 RIC (AU) vs S&P/ASX Small Ords
Source: Factset, December 2016
Ridley produced 1,900kt of feed in FY15 generating A$910m revenue. Poultry feed
production was 1,000kt which is around 50% of total feed volumes.
Fig 195 Ridley feed volumes by market Fig 196 Ridley operating performance 1996 - 2015
Source: Ridley company data, December 2016 Source: Factset, December 2016
Operations & Customers
Ridley reported EBITDA margins ranging between 3.9% and 8.7%, with an average of
5.7%, between 1996 and 2015. The low margins would suggest that competition within the
feed industry is high and demand within some sectors can be impacted by climatic
conditions and availability of natural feed.
An Australian outbreak of Avian Influenza in November 2012 closed some of Ridley’s
export markets for its rendering segment. The Chinese and Indonesian export markets
(two of Ridley’s largest) were still closed when another detection occurred in October 2013.
-%
50%
100%
150%
200%
250%
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
RIC (AU) S&P/ASX Small Ords
Poultry53%
Dairy15%
Rendering10%
Pig9%
Other13%
FY15 feed volume
-1%
1%
3%
5%
7%
9%
11%
13%
15%
0
200
400
600
800
1,000
1,200
1,400
1,600
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Sales EBITDA EBITDA Margin (%)
A$m
Ridley Corp. Ltd.
produces and
markets stock feed
and animal feed
supplements
Macquarie Wealth Management Inghams Group
21 December 2016 106
Ridley has ongoing product development programs aimed at improving nutrition, biomass
conversion and economic performance for its customers and growers. Ridley is focused on
servicing the major poultry growth corridors of Victoria, South Australia and Queensland.
The company states it is in regular discussion with its major customers to secure volumes
necessary before new feed mill projects are approved.
Ridley paid $4.5m to acquire a long-term poultry feed supply agreement during 1H14. The
initial six year contract generated significant additional poultry feed volumes and allowed
the customer to close their urban-located feed mill.
Risks
Risks to Ridley’s feed business noted by the company include: Cyclical fluctuations,
influence of domestic harvest (variance of input prices), Influence of natural pasture on
supplementary feed decision making, impact on domestic and export markets in the event
of a disease outbreak, customer concentration and risk of regional consolidation, property
holdings and corporate risk.
Macquarie Wealth Management Inghams Group
21 December 2016 107
Key customers - Australian Supermarkets - state of play Coles supermarket performance continues: Coles has continued to deliver strong
comparable store sales growth of 3.3% Easter adjusted in 4Q16, despite increasing
deflation of 2.4% over the 4Q16. This implies an underlying volume growth of 5.8% in the
4Q16. Management commented during the result call that transaction growth seen in FY16
was the strongest in two years, which matches with the output from our analysis in the Fig
below. While deflation and the increased competition in SA and WA has dampened Coles’
F&L EBIT margins by ~13bps in 2H16 the result is very strong compared to the rest of the
market.
WOW has delivered a sales result that appealed to the market. Comparable store
sales improved between 3Q16 and 4Q16 in Food (-1.3% to -1.1%), ahead of market
expectations. Furthermore, WOW noted comparable store sales growth improved further to
0.3% over the first eight weeks of FY17, in line with company expectations. While still at
the early stages of turning around the underperforming supermarkets divisions positive
signs can be seen, however, we are still cautious of timing given the continued
deterioration in sales per square metre.
The divergent performance, particularly around real growth (volumes) is clear from the two
sales decomposition charts below. From a volume and total sales growth perspective the
recent trends have been starkly in favour of Coles.
Fig 197 WOW F&L performance remains subdued Fig 198 Coles F&L volume growth remains strong
Source: Woolworths company Data, Macquarie Research, December 2016 Source: Coles company Data, Macquarie Research, December 2016
Since WES took over Coles and invested in the store network to drive productivity it has
outperformed WOW supermarkets on comp store basis. This outperformance over the last
7 years has increased Coles sales/sqm to a point where it now exceeds WOW.
Fig 199 Coles continues to significantly outperform Fig 200 Coles stores more productive than WOW
Source: Coles & Woolworths company Data, Macquarie Research, December 2016 Source: Coles & Woolworths company Data, Macquarie Research, December 2016
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
1Q
11
2Q
11
3Q
11
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
3Q
13
4Q
13
1Q
14
2Q
14
3Q
14
4Q
14
1Q
15
2Q
15
3Q
15
4Q
15
1Q
16
2Q
16
3Q
16
4Q
16
Woolworths CPI Real growth
Space/ new business Total
Contribution to Sales Growth (%)
Contribution to Sales Growth (%)
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
1Q
09
2Q
09
3Q
09
4Q
09
1Q
10
2Q
10
3Q
10
4Q
10
1Q
11
2Q
11
3Q
11
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
3Q
13
4Q
13
1Q
14
2Q
14
3Q
14
4Q
14
1Q
15
2Q
15
3Q
15
4Q
15
1Q
16
2Q
16
3Q
16
4Q
16
Coles CPI Real growth
Space/new business Total growth
Contribution to Sales Growth (%)
Contribution to Sales Growth (%)
-0.6%
3.3%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
Dec-0
4
Jun-0
5
Dec-0
5
Jun-0
6
Dec-0
6
Jun-0
7
Dec-0
7
Jun-0
8
Dec-0
8
Jun-0
9
Dec-0
9
Jun-1
0
Dec-1
0
Jun-1
1
Dec-1
1
Jun-1
2
Dec-1
2
Jun-1
3
Dec-1
3
Jun-1
4
Dec-1
4
Jun-1
5
Dec-1
5
Jun-1
6
% ChangeYoY WOW Food & Liquor Comparables
Coles Food & Liquor Comparables
7,000
9,000
11,000
13,000
15,000
17,000
19,000
FY
04
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17e
FY
18e
Sales/sqm ($)
Coles F&L sales/sqm WOW F&L sales/sqm
Macquarie Wealth Management Inghams Group
21 December 2016 108
Supermarkets “rationally competitive”?
Previously Coles’ management have defined the Australia supermarkets sector as
“rationally competitive”. While many in the market either simply do not agree, or remain
uncertain, there is no doubt that competition has stepped up in 2016.
Recently WOW re-established its price credentials in the important meat category, largely
neutralising out-of-the-market pricing across key value items (KVIs) such as mince and
chicken breast (Dec 2015), and establishing a strong value proposition in seasonally driven
lamb category.
The competitive response was predictably prompt, with Aldi moving below WOW’s pricing
in lamb and Coles using whole chickens as a new value proposition within Everyday.
However, it does demonstrate that WOW is warming up to the challenge of re-establishing
its value credentials.
This is just one of many skirmishes taking place in the marketplace and needs to be
followed by WOW with significant improvements in services standards in store and stock
availability if improved pricing is to lead to the sales and profit line. WOW had previously
admitted its key concern remains winning back the “value” and “premium” family
customers, and investing in the brands value proposition clearly indicates where it is doing
most of the work.
WOW’s shift to more proactive promotional tactics has required some readjustment from
the competition, but much of the investment to date has been on realigning WOW’s value
proposition back to market. Regardless, there has been a notable shift in competitive
response in June, which suggests that Coles’ promotional budget may need to see a
modest reallocation from proactive strategies to reactionary tactics.
Fig 201 Price investment has been driving
supermarket deflation and is expected to continue
Fig 202 Investing in prices lowered WOW’s F&L
margins significantly and are currently below Coles
Source: Coles & Woolworths company Data, Macquarie Research, December 2016
Source: Coles & Woolworths company Data, Macquarie Research, December 2016
We do not believe Coles is being unnecessarily dismissive of the competitive landscape,
particularly since a number of suppliers have noted its unilateral price increases in June: a
clear flag for profit management, which has traditionally been the domain of WOW under
previous management. What Coles may be contemplating, however, is WOW’s ability to
effectively compete, given the company’s balance sheet constraints.
-0.1%
-2.40%
-2.70%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
Sep
-04
Mar-
05
Sep
-05
Mar-
06
Sep
-06
Mar-
07
Sep
-07
Mar-
08
Sep
-08
Mar-
09
Sep
-09
Mar-
10
Sep
-10
Mar-
11
Sep
-11
Mar-
12
Sep
-12
Mar-
13
Sep
-13
Mar-
14
Sep
-14
Mar-
15
Sep
-15
Mar-
16
% ChangeQoQ ABS Food Inf lation
Coles food & Liquor Inf lation (avg. prices)
WOW avg price changes (new)
WOW avg price changes (old)
5.0%5.2%
2%
3%
4%
5%
6%
7%
8%
9%
10%
FY
04
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17e
FY
18e
FY
19e
F&L EBIT margin
Woolworths
Coles
Macquarie Wealth Management Inghams Group
21 December 2016 109
Inghams (ING:$3.08) 20-Dec-16
Interim results 2H/15A 1H/16A 2H/16A 1H/17E Profit & Loss 2016A 2017E 2018E 2019E
Revenue 2271.9 0.0 2308.7 1187.5 Revenue $m 2308.7 2375.0 2422.0 2467.6
EBITDA $m 114.5 0.0 167.5 91.2 EBITDA $m 167.5 190.1 208.6 219.5
Depreciation $m 33.3 0.0 34.4 20.2 Depreciation $m 34.4 42.2 50.0 53.6
Amortisation of goodwill $m 0.0 0.0 0.0 0.0 Amort (non-cash backed) $m 0.0 0.0 0.0 0.0
EBIT $m 81.2 0.0 133.1 71.0 EBIT $m 133.1 147.9 158.6 165.9
Net Interest expense $m 19.2 0.0 18.0 7.6 Net interest expense $m 18.0 15.3 14.8 14.5
Pre-Tax Profit $m 62.0 0.0 115.1 63.4 Pre-Tax Profit $m 115.1 132.6 143.8 151.3
Tax Expense $m 10.3 0.0 32.0 16.1 Tax Expense $m 32.0 33.7 37.4 39.3
Net Profit $m 51.7 0.0 83.1 47.3 Net Profit $m 83.1 98.9 106.4 112.0
Outside equity interests $m 0.0 0.0 0.0 0.0 Outside equity interests $m 0.0 0.0 0.0 0.0
Net Abn/Extra $m 0.0 0.0 0.0 0.0 Net Abnormals/Extra. $m 0.0 -53.6 0.0 0.0
Reported Earnings $m 51.7 0.0 83.1 47.3 Reported Earnings $m 83.1 45.3 106.4 112.0
Adjusted Earnings $m 51.7 0.0 83.1 47.3 Adjusted Earnings $m 83.1 98.9 106.4 112.0
Gross Cashflow $m 95.3 0.0 149.5 67.6 Gross Cashflow $m 149.5 167.3 160.1 167.6
EPS (Adj/dil) c 13.6 0.0 21.9 12.4 EPS (adj/diluted) c 21.9 26.0 28.0 29.5
EPS growth % -9.3 nmf 60.7 nmf EPS growth % 60.7 19.1 7.6 5.2
CFPS c 25.1 0.0 39.3 17.8 PE (adj) x 14.1 11.8 11.0 10.5
CFPS Growth % -22.0 nmf 56.9 nmf CFPS c 39.3 44.0 42.1 44.1
EBITDA/Sales % 5.0 nmf 7.3 7.7 CFPS Growth % 56.9 11.9 -4.3 4.7
EBIT/Sales % 3.6 nmf 5.8 6.0 PGCFPS x 7.8 7.0 7.3 7.0
Earnings Split % 100.0 0.0 100.0 47.8 DPS c 0.0 11.5 19.0 20.0
Revenue Growth % 1.9 nmf 1.6 nmf Yield % 0.0 3.7 6.2 6.5
EBIT Growth % -20.3 nmf 63.9 nmf Franking % nmf 100.0 100.0 100.0
Profit and Loss ratios 2016A 2017E 2018E 2019E Cashflow Analysis 2016A 2017E 2018E 2019E
Revenue Growth % 1.6 2.9 2.0 1.9
EBIT Growth % 63.9 11.1 7.2 4.6 Pre-tax Profit $m 115.1 132.6 143.8 151.3
EBITDA/Sales % 7.3 8.0 8.6 8.9 Depreciation & Amortisation $m 34.4 42.2 50.0 53.6
EBIT/Sales % 5.8 6.2 6.5 6.7 Tax Paid $m 0.0 -7.5 -33.7 -37.4
Effective tax rate % 27.8 25.4 26.0 26.0 Gross cashflow $m 149.5 167.3 160.1 167.6
Payout ratio % 0.0 0.4 0.7 0.7 Changes in working capital $m 0.0 -38.3 -3.5 -5.7
EV/EBIT x 11.6 10.6 9.8 9.3 Other $m 6.7 -63.0 -11.8 -11.0
EV/EBITDA x 9.2 8.2 7.4 7.0 Operating Cashflow $m 156.2 66.1 144.7 150.9
EV/Sales x 0.7 0.7 0.6 0.6 Acquisitions $m 0.0 0.0 0.0 0.0
Balance sheet ratios Capex - Plant & Equip. $m -76.8 -85.0 -60.0 -61.8
ROE % 127.2 66.7 57.5 50.2 Asset Sales $m 0.0 0.0 0.0 0.0
ROA % 19.4 16.2 16.6 17.0 Other $m 6.6 0.0 0.0 0.0
ROFE % 53.5 27.9 27.7 27.9 Investing cashflow $m -70.2 -85.0 -60.0 -61.8
Net Debt $m 366.9 396.0 379.3 364.4 Dividend (ordinary) $m 0.0 -10.3 -68.0 -74.1
Net Debt/Equity % 280.7 238.9 185.8 150.5 Equity raised $m 0.0 0.0 0.0 0.0
Interest Cover x 7.4 9.7 10.7 11.4 Other $m -86.0 0.0 0.0 0.0
ND/EBITDA x 2.5 2.1 1.8 1.7 Financing cashflow $m -86.0 -10.3 -68.0 -74.1
Price/NTA x 9.0 7.1 5.7 4.8
NTA per share $ 0.34 0.44 0.54 0.64 Net Change in cash/debt $m 0.0 -29.1 16.7 15.0
EFPOWA m 380.2 380.2 380.2 380.2
Historical performance* 2013A 2014A 2015A 2016A Balance Sheet 2016A 2017E 2018E 2019E
Cash $m 51.3 51.3 51.3 51.3
Revenue $m 0.0 2230.5 2271.9 2308.7 Receivables $m 221.3 239.9 242.2 246.8
EBITDA $m 0.0 142.1 114.5 167.5 Inventories $m 274.9 285.0 290.6 296.1
Depreciation/Amortisation $m 0.0 40.2 33.3 34.4 Investments $m 1.6 1.6 1.6 1.6
EBIT $m 0.0 101.9 81.2 133.1 Property, plant & equipment $m 372.0 414.8 424.9 433.0
Net interest expense $m 0.0 19.9 19.2 18.0 Intangibles $m 0.0 0.0 0.0 0.0
Pre-Tax Profit $m 0.0 82.0 62.0 115.1 Other Assets $m 5.3 5.3 5.3 5.3
Tax Expense $m 0.0 25.0 10.3 32.0 Total Assets $m 926.4 997.9 1015.9 1034.1
Net Profit $m 0.0 57.0 51.7 83.1 Payables $m 237.9 228.3 232.8 237.1
Net Abn/Extra $m 0.0 0.0 0.0 0.0 Short Term Debt $m 0.0 0.0 0.0 0.0
Long Term Debt $m 418.2 447.3 430.6 415.7
EPS (adj/dil) c nmf 15.0 13.6 21.9 Other Liabilities $m 139.6 156.5 148.3 139.3
EPS growth % nmf nmf -9.3 60.7 Total Liabilities $m 795.7 832.1 811.7 792.0
Ordinary DPS c 0.0 0.0 0.0 0.0 Shareholders Funds $m 130.7 165.8 204.2 242.1
EBITDA/Sales % nmf 6.4 5.0 7.3 Minority Interests $m 0.0 0.0 0.0 0.0
EBIT/Sales % nmf 4.6 3.6 5.8 Total Shareholders Equity $m 130.7 165.8 204.2 242.1
ROE % nmf nmf nmf 127.2
ROFE % nmf nmf nmf 53.5 Total Funds employed $m 926.4 997.9 1,015.9 1,034.1
EFPOWA m 0.0 380.2 380.2 380.2
Segments 2016A 2017E 2018E 2019E
Sales (A$)
Australia $m 1955.2 2003.3 2043.4 2084.2
NZ $m 353.5 371.7 378.6 383.4
Total 2308.7 2375.0 2422.0 2467.6
EBITDA (A$)
Australia $m 132.2 153.1 169.6 179.2
NZ $m 35.3 37.0 39.0 40.3
Total $m 167.5 190.1 208.6 219.5
EBITDA margin
Australia 6.8% 7.6% 8.3% 8.6%
New Zealand 10.0% 10.0% 10.3% 10.5%
Source: Macquarie Research EBITDA margin 7.3% 8.0% 8.6% 8.9%
Macquarie Wealth Management Inghams Group
21 December 2016 110
Important disclosures:
Recommendation definitions
Macquarie - Australia/New Zealand Outperform – return >3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield
Macquarie – Asia/Europe Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%
Macquarie – South Africa Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%
Macquarie - Canada Outperform – return >5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return >5% below benchmark return
Macquarie - USA Outperform (Buy) – return >5% in excess of Russell 3000 index return Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return
Volatility index definition*
This is calculated from the volatility of historical price movements. Very high–highest risk – Stock should be expected to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to
move up or down at least 25–30% in a year. Low – stock should be expected to move up or down at least 15–25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only
Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations
Financial definitions
All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).
Recommendation proportions – For quarter ending 30 September 2016
AU/NZ Asia RSA USA CA EUR Outperform 47.26% 55.50% 38.46% 45.47% 59.09% 48.21% (for US coverage by MCUSA, 8.20% of stocks followed are investment banking clients)
Neutral 38.01% 29.31% 42.86% 48.77% 37.88% 36.79% (for US coverage by MCUSA, 8.25% of stocks followed are investment banking clients)
Underperform 14.73% 15.19% 18.68% 5.76% 3.03% 15.00% (for US coverage by MCUSA, 8.00% of stocks followed are investment banking clients)
ING AU vs Small Ordinaries, & rec history
(all figures in AUD currency unless noted)
Note: Recommendation timeline – if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.
Source: FactSet, Macquarie Research, December 2016
12-month target price methodology
ING AU: A$3.65 based on a DCF methodology
Company-specific disclosures: ING AU: MACQUARIE CAPITAL (AUSTRALIA) LIMITED or one of its affiliates managed or co-managed a public offering of securities of Inghams Group Ltd in the past 12 months, for which it received compensation. MACQUARIE CAPITAL (AUSTRALIA) LIMITED or one of its affiliates managed or co-managed a public offering of securities of Inghams Group Ltd in the past 12 months, for which it received compensation. Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Inghams Group Ltd's equity securities. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures.
Date Stock Code (BBG code) Recommendation Target Price
Target price risk disclosures: ING AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures.
Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Limited (MGL) total revenues, a portion of which are generated by Macquarie Group’s Investment Banking activities. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited ABN 58 002 832 126, AFSL 238947, a Participant of the ASX and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Wealth Management, a division of Macquarie Equities Limited ABN 41 002 574 923 AFSL 237504 ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited (“MENZ”) an NZX Firm. Macquarie Private Wealth’s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN 46 008 583 542,
Macquarie Wealth Management Inghams Group
21 December 2016 111
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This publication was disseminated on 20 December 2016 at 13:14 UTC.