Tegel shares drop 10% as first-half result misses estimates

Tegel Group shares tumbled 10 percent after New Zealand's biggest poultry producer said first-half earnings fell  2.3 percent, missing estimates and stoking concern it hasn't managed to stabilise profitability in a domestic market where competition is restraining prices.

The shares fell 14 cents to $1.26. They have recovered from a record low $1.05 in May this year but remain below the $1.55 price it was sold in last year's initial public offering when it was taken public by private equity firm Affinity Equity Partners.

Net profit was $14.8 million in the six months ended Oct. 29, from $15.1 million a year earlier, the Auckland-based company said in a statement. Sales rose 2 percent to $302 million as Tegel lifted processed poultry volumes by 0.8 percent to 48,676 tonnes.

"The result was below expectations and not as clear as people had hoped for," said Shane Solly, a director at Harbour Asset Management. "There has been some expectations of a smoothing of profitability and that hasn't come through. It still looks like the business needs a bit of work done." 

The company had failed to meet its initial prospectus targets in the face of a domestic glut of chicken which constrained prices. Today it said domestic pricing "remains competitive and this will continue" although Tegel also said it is benefiting from lower commodity prices and that some of the expenses in the first half were "non-repeating costs".

"Looking at the remainder of FY18, we will maintain our domestic market share in a challenging pricing environment," chairman David Jackson and chief executive Phil Hand said in the interim report. "Our Australian exports have diversified into more channels and customers. We continue to work towards exceeding FY17 underlying ebitda."

In the first half, underlying earnings before interest, tax, depreciation and amortisation fell 1.7 percent to $34.6 million. Tegel's income statement shows the biggest gain in expenses came from distribution, which rose to $28.7 million from $25.6 million. Administration expenses were little changed at $18.2 million while finance costs fell to $2.8 million from $3.6 million.

Gross profit as a percentage of sales rose to 23.3 percent from 23.2 percent. Gross profit was boosted by growth in revenue, lower feed costs and improved operational efficiency from capital investment, Tegel said. 

In its domestic operations, volumes rose 1.7 percent to 40,769 tonnes and sales rose 4 percent to $226 million. The largest revenue gains were through retail and food service channels and in its presentation, Tegel noted: "Continued poultry consumption growth with increases in all domestic channels during the half-year" and "Changing trends of consumers looking for increasingly convenient meal solutions being reflected in growth in QSR (quick-service restaurant) and food service."

Export volumes fell 3.5 percent to 7,907 tonnes while revenue dropped 11.5 percent to $44.8 million. The decline reflected a drop in the Australian market, which had been expected, the company said. Tegel was working to diversify its channel and customer mix and had won new customers in retail, food service and QSR, it said. The company had expanded in the Australian retail channel and launched 11 products.

Tegel also highlighted its move into free-range poultry, saying its growth via grocery had soared 225 percent, outpacing a 63 percent gain in the total free-range market. Free-range was now worth $55.9 million in New Zealand grocery, and now accounted for 12 percent of total poultry scan sales market share, it said.

The compared declared an interim dividend of 3.45 cents a share, unchanged from a year earlier, to be paid on Jan. 26.

(BusinessDesk)