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Why this top broker is tipping Inghams Group Ltd to rally through the next month

Winner winner chicken dinner! Short-term investors may want to hop on to this one as the share price of Inghams Group Ltd (ASX: ING) is poised to charge ahead in the near-term if Morgan Stanley is to be believed.

The broker believes there is an 80%+ chance that the poultry producer will outperform the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) in the next 45 days on the back of the collapse of a key rival.

Red Lea Chickens has called in liquidation experts McGrath Nicol after going into voluntary administration. The business will now likely be wound down as it became the victim of higher energy and feed costs.

While Red Lea is a small player with only around 4% of the local chicken market compared to Inghams’ 40% market share, the benefits from its exit will likely extend beyond the extra profits that could flow Inghams’ way.

“Assuming ING takes share of Red Lea’s sales in line with its market share at our FY19E 9% EBITDA [earnings before interest, tax, depreciation and amortisation] margin, this could deliver [circa] 3% EBITDA upside to FY19, and at an incremental EBITDA margin of 12% could deliver 4% EBITDA upside,” said Morgan Stanley.

“We view this as a positive for ING, as it has the B/S [balance sheet] to withstand pressures, and industry consolidation will likely lead to less competition and a more rational market.”

What’s perhaps more significant is that a more rational market will give Inghams greater power to pass on rising costs.

Red Lea probably isn’t the only smaller producer that is under pressure. Other small producers could also go the way of the dodo, a trend that would be of great benefit to Inghams and its shareholders.

It will be interesting to see if chickens can indeed fly.

Inghams supplies to the major supermarkets owned by Woolworths Group Ltd (ASX: WOW) and Wesfarmers Ltd (ASX: WES).

The market hasn’t quite caught on to the potential upside for Inghams. The stock is up 0.5% in afternoon trade to $3.52 but is down 7.5% over the past year when the ASX 200 is 1.9% in the black.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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