(ASX:ING) Inghams Pt.2

Back to Ingham’s.

I always think what measure or ratio would be the right marker for a company’s value. I know, for each company this will differ for obvious reasons however a common measure that is applied to most companies is ROE & ROIC.

Firstly, Ingham’s is a market leader with c40% market share and we can assume high returns as a signal. Lets see.

ROE

Return on Equity (ROE), equal to net income / equity is a ratio that highlights the percentage return on equity. As of 30th June 18 Ingham’s ROE was a whopping 44%. As follows;

  • Net Profit: $114m
  • Equity: $261m
  • Return on equity: 44%

Interestingly, the company has reported equity of $261m for a company with a market value of $1.64b & Debt of $.42b. (Hint: private equity ripped it all out). Equity, representing net assets and Ingham’s doesn’t have a much; most of its fixed assets were offloaded part of the sale & lease back pre-IPO.

ROIC

Now, lets account for their debt or total capital via Return on Invested Capital (ROIC). Noting Ingham’s reported Interest Bearing Debt in FY18 of $420m.

  • Net Profit: $114m
  • Equity: $261m
  • Debt: $420m
  • ROIC: 16.7%

Still.. a ROIC of 16.7% isn’t something to moan about. However, this doesn’t include the value of leases held off the balance sheet.

Adjusted ROIC

The total lease commitments reported off-balance sheet were $1.3b. And now to account for leases as capital the following method (see reference) has been applied to determine the value.

Asset Value = Rental Expense / (Cost of Debt + (1 / Asset Life)) or $87m / (4.5% + (1 / 20)) = $915m.

  • Net Profit: $114m
  • Equity: $261m
  • Debt: $420m
  • Leases $915m
  • Return on Capital: 7.1%

And finally we get a return figure that is more reflective of the industry at 7.1%


Noting the above, what does this mean for the investor? After all, the ratios represent the returns achieved on capital invested in the past.

However, we could infer that if the previous capital investments are returning 7% then the future returns are bleak.

In fact, the future isn’t that bright. The real price of chicken adjusted for inflation has fallen for the past c.20 years. So future revenue from price increases are nil.

Could Ingham’s increase market share from its rival Baiada Poultry Pty Ltd and other incumbents. How could Ingham’s increase its volumes apart from decreasing its price? There is virtually nil differentiation or meaningful edge between Ingham’s and Baiada Poultry.

And lastly, I don’t see the major retailers releasing pressure on their suppliers.

Anyway, as a hypothetical, lets apply the previous returns on capital to assume future returns. We can asses the opportunity to reinvest earnings not paid out.

The current dividend paid in FY18 was c$70.6m (60%). The remaining 40% can be reinvested at rates between circa 7% – 8% (if achievable) that’s an implied growth rate of 3%.

Nonetheless, Ingham’s trades at a market value of c$1.6b & enterprise value c$1.9b.

Reference

Valuation – Measuring and Managing the Value of Companies

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