The share price of poultry business Tegel Group has come under enormous pressure today, sliding more than 17% to $1.24. The shares did trade as much as 19.7% lower at $1.20 at one point.
Tegel Group, which trades as TEGEL GRP FPO NZX (ASX: TGH), according to Google Finance, is a New Zealand-based poultry producer. Before the market opened this morning, the company released its earnings results for the six months ended 23 October 2016, which appear to be the catalyst behind the heavy decline in its share price.
On a positive note, Tegel said it had increased its domestic (meaning New Zealand) market share by 2%, which already stood at 48%, according to the prospectus of one of its major competitors, Inghams Group Ltd (ASX: ING).
This is one reason why shareholders of Inghams Group may be a little concerned today. Inghams also disclosed that it controlled 34% of the NZ market itself, suggesting Tegel may be stealing some of its thunder. Inghams' shares have fallen 2.2% so far today to trade at $3.05.
However, this gain in market share appears to have come at the expense of product pricing. The company said it had sold 48,000 tonnes of poultry for the period, up 6.9% on the prior corresponding period, compared to growth of just 4% in revenue to $296.3 million.
By my calculations, that suggests the company achieved $6.13 per tonne of poultry sold in the New Zealand market, down from $6.30 in the same period last year. It also sold each tonne of exported poultry for $6.18, down from $6.34 in the prior corresponding period. Thus, its gross profit declined 3.9%, with gross margin now at 23.2% — down from 25.1% in the same period last year.
You can see my calculations below:
Indeed, in today's update, Tegel noted it has enjoyed continued growth from customers in Dubai and new customers won in the Philippines. It also said "recent developments allow a wider range of Tegel products to be exported to Australia," which is likely another one of the factors dragging on Inghams' shares today.
Although Inghams didn't include Tegel's Australian market share when it prepared its prospectus (see below), the threat of Tegel expanding in Australia may be a concern for shareholders nonetheless.
What's more, the fact that Tegel was forced to reduce its prices suggests Inghams may have to become more competitive with its own pricing, which could impact both its top line and bottom line results. In fact, Inghams has already said that a 1% decrease in its average selling price could wipe close to $17 million off its profit, equating to around 17% of the pro forma net profit it forecast for the 2017 financial year.
Inghams Group first listed its shares on the ASX in November this year for a price of $3.15.
Should you worry?
Inghams believes it has the ability to significantly improve its operating efficiencies to continue growing its bottom line. Growth in chicken consumption could also continue, together with a long-term shift towards higher levels of processing to help the shares climb over time, but it isn't without risks.
While there is the potential for other competitors to try and steal some of Inghams' market share by selling their products at lower prices, the supermarkets themselves – in particular Woolworths Limited (ASX: WOW) and Coles, owned by Wesfarmers Ltd (ASX: WES) – could also pass on pricing pressure to suppliers such as Inghams. This has happened with other popular businesses such as Coca-Cola Amatil Ltd (ASX: CCL) in the past.
Although Tegel's update today isn't a thesis-breaker for Inghams, it is something shareholders of both companies should keep a close eye on. Perhaps Inghams' next set of earnings results will shed some more light on the situation, for those willing to wait for a better glimpse into the company's performance.
