Small Caps | Mar 01 2023
This story features INGHAMS GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: ING
By Tim Boreham, Editor, The New Criterion
The just-concluded profit reporting season has shown that consumer-exposed stocks are coping with the well-heralded spikes in input costs such as energy and soft (food) commodities.
For now. The key question is the degree to which they can keep raising prices in a climate in which shoppers look to be gravitating either to the discount bin or – perversely – the premium end.
An excellent case study of the complex inflation tapestry is the country’s biggest chicken producer, Inghams Group ((ING)).
Being involved in all stages of production, Inghams has more control over its supply chain. At the consumer end, chicken is attractive in recessionary times because it costs less than red meats.
Oh – and chickens produce five times fewer carbon emissions (per kilogram) than a cow.
That all should make for a happy coop, but investor feathers have been ruffled by a sharp uptick in input costs, especially for feedstock and, of course, labour. In New Zealand, where Inghams has extensive operations, the company faces a shortage of carbon dioxide (which it needs for cooling).
At the same time supply of new chicks has been constrained – the result of less-than-virile roosters resulting in poorer-quality eggs.
Humans face the same dilemma too, but that’s another story…
If Inghams’ half-year commentary is anything to go, input costs are abating with “stabilised but elevated” feedstock prices (the pressure stems from high wheat and soy prices).
What’s more, the company has pushed through price increases across “all customers and channels” and expects to do so again.
Proffering unusual and admirable detail on this sensitive topic, Inghams reports its average selling price rose 8.5% year-on-year, to $5.79/kilogram for the half and $5.99/kg in the month of December.
But the cost of sales rose 10.9% year-on-year.
“We will pass on further price increases as required,” CEO Andrew Reeves assures investors (or warns customers – take your pick).
Inghams, by the way, posted a net profit of $17.2m, down -55% year on year but much better than the largely profitless June 2022 stanza.
While volumes decline slightly to 235,000 tonnes, revenue climbed 9% to $1.52bn. The interim dividend of 4.5c was lower than the previous 6.5c interim payout, but that’s better than last-year’s paltry final distribution.
The numbers didn’t cause too much of a flap – they were pretty much expected – while Reeves also refers to a “deceleration” of inflation.
So perhaps Reserve Bank head Philip Lowe should be spending more time around Ingham’s henhouses than with bond market screen jockeys around the Barrenjoey boardroom?
As with Inghams, Costa Group ((CGC)) has inherent advantages because of its entrenched, market-leading position, but the corporate soil has been less than fertile.
Our biggest fruit and vegie grower, Costa continues to struggle not just with pricing and input costs, but the impact of floods.
Costa grows, packs and markets berries, mushrooms, glasshouse tomatoes, citrus and avocados. The company has geographically diversified operations across 7200 hectares, including 40 hectares of glasshouse facilities, which hedges against adverse weather (but only to a degree).
Costa also has operations in China – an important growth lever for the company – as well as Chile and Morocco.
Costa posted a -10% decline in reported net profit for the 2022 calendar year to $47m, with earnings before interest tax depreciation and amortisation remaining steady at $215m.
Revenue rose 11% to $1.357bn, reflecting cost inflation and flood-related supply shortages, notable for avocados.
Freight costs soared 40%, with another 14% rise expected this year when transport contracts are renewed. Fertiliser and chemical costs increased by around 10%.
The company was protected by fixed energy pricing arrangements, but budgets for a 35% rise in electricity costs this year. Overall, the energy cost pain is offset partially by Albo’s capped domestic gas price manifesto.
Management expects the “significant” cost pressures to moderate this year and has undertaken some agriculture 101 initiatives to control input costs. These include insourcing seasonal labour, adopting automation and using water and fertiliser more wisely.
On that assessment, Costa faces another tough year but its revenue line implies that it’s in a good position to push through price increases.
Checking into the dairy, Bega Foods ((BGA)) has been out of favour because of ratcheting farm-gate milk prices, which means it has to pay the cow cockies more.
One of the country’s best-known food names, Bega operates under its eponymous brand as well as Dairy Farmers, Yoplait and Pura Milk, to name a few.
It also owns the revered Vegemite name, but investors haven’t exactly had a rose in every cheek: the shares have lost one-quarter of their value over the past year.
Bega’s normalised half year earnings fell to $9.4m from $35.5m previously, with revenue climbing 11% to $1.68bn.
On the cost side, Bega has had to deal with the opening farm gate milk price soaring 33% for the 2022-23 year. But end customers haven’t baulked at the “unprecedented” double-digit price rises, with consumption levels not affected.
Management reports the price increase in dairy commodities – the result of global shortages – looks to have peaked.
Meanwhile, gourmet foods (and hamper) purveyor Maggie Beer Holdings ((MBH)) posted a -10% decline in December half net profit, to $7.2 m, with net sales declining -4.5% to $50m.
Management is happy with this lower turnover, noting the decline compares with a covid-boosted comparable half when folk were dining in.
The company reports ‘elevated” freight and advertising expenses, but otherwise appears unfazed.
Maggie Beer is famed for its quinces and pates – the sort of bourgeois stuff that gets chopped in a recession.
Or perhaps not – there’s evidence many people keep these little luxurious morsels for in home consumption, rather than dining out.
Meanwhile, Maggie Beer has made inroads into the hamper business, having acquired Hampers & Gifts Australia for -$40m in cash and scrip in mid 2021.
Hampers are high margin – arranging jars in a wicker basket and tinsel does wonders for returns – but the business is more aligned to corporate clientele and we wonder how this business will fare in a downturn.
Having lost almost two-third of their value over the last year, Maggie Beer shares arguably look like a tempting morsel. The company has $17.4m and no debt, relative to its $67m market cap.
The enduring lesson is that hiking prices to cover costs isn’t as easy as armchair pundits make it out to be. Consumers eventually will squeal – having been lulled by years of deflation – and market share will suffer.
Few CEOs relish fronting their board with the news that a double-digit price rise has been posted – but that a key customer is now in the bosom of a loss-leading rival.
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