The Inghams Group Ltd (ASX: ING) share price has been on a rollercoaster ride since the group's initial public offering (IPO) late last year.
Upon going public on 7 November for a price of $3.15 per share, the Inghams share price has traded for as much as $3.46 and as little as $2.98. They were trading for about $3.30 on Friday, giving initial investors a paper gain of just under 5%.
As a reminder, Inghams is one of Australia's biggest poultry producers, controlling roughly 40% of the Australian market. It's likely you're familiar with many of its products, including roast chickens, chicken nuggets and schnitzels, as well as turkey drumsticks. We covered its IPO in further detail here and here.
Given its size and liquidity, Inghams' shares have now also been added to the S&P/ASX 300 Index.
Business Performance
Inghams' shares came under pressure when the group reported their maiden financial results as a public company back in February. For the first-half of the 2017 financial year, it reported a 4.3% rise in revenue compared to a 13% increase in poultry volume, suggesting a decline in sales prices. It enjoyed stronger-than-expected growth in Australia but New Zealand volumes were flat.
The group's margins did expand. Earnings before interest, tax, depreciation and amortisation (EBITDA) increased 9.1% while pro forma net profit rose 13.8% to $51.3 million.
Inghams recently announced that it will expand its farming, milling and processing capacity in Western Australia over the next three years which will enable it to meet local market demand with locally-grown products.
Competition Concerns
When Inghams first listed its shares on the market, we listed a number of potential risks, including competition. Indeed, Inghams is one of the major suppliers of poultry in Australia and New Zealand with a dominant share in both markets, but it isn't alone: Baiada is estimated to have a 33% share of the Australian market (Inghams: 40%) while estimates put TEGEL GRP FPO NZX's (ASX: TGH) New Zealand market share at around 48% at the time of Inghams' IPO (Inghams: 34%).
However, Tegel reported in December that it had grown its New Zealand market share by 2%; it's not clear if this came at Inghams' expense, but Inghams did note its struggles in that market during the December half (as mentioned previously). It also appears that Tegel's growth in that market came at the expense of product pricing, which suggests the pair could both be competing rather aggressively for growth. Indeed, price reductions was one of the other challenges we mentioned could hinder Inghams' future prospects.
Further, Inghams is also highly reliant on businesses such as Woolworths Limited (ASX: WOW) and Coles – owned by Wesfarmers Ltd (ASX: WES) – through which it makes a large portion of its sales. These companies have the ability to pass pricing pressure on to suppliers which does leave Inghams somewhat vulnerable.
Is Inghams a buy?
Inghams confirmed that it is still on track to hit a pro forma net profit result of $98.8 million for FY17. With a market capitalisation of around $1.2 billion, that puts the shares on a forward price-earnings multiple of just over 12x.
That's not overly expensive, but investors do need to consider those risks highlighted above, together with the somewhat low growth forecast for revenue – around 3% in 2017. Much of the earnings growth is instead tipped to come from cost-cutting initiatives which cannot go on forever.
While Inghams does deserve a closer look, I'm personally not investing in Inghams at this stage.
