In 1966, Australians consumed 7 kilograms of chicken per person, usually during the ritual of a Sunday “chook” roast. Forty years later, we consume 46.2 kilograms of chicken per person each year, far exceeding our intake of beef, veal, lamb and pork.
Beef and veal, a mainstay in Australian diets in ‘70s and ‘80s have been in long-term decline. Lamb consumption has trended lower over the past few decades despite some terrific marketing campaigns over the years. Pork consumption is rising.
Remarkably, pork consumption per person almost matched beef and veal consumption in FY16, Australian Bureau of Agriculture and Resource Economics (ABAREs) data shows. Consumers, clearly, are favouring white over red meats.
That’s good news for poultry producers and fast-food companies that specialise in chicken. It’s hard to see the trend declining as productivity improvements lift farming efficiency and stimulate lower prices. As chicken becomes cheaper, beef prices are rising.
Poultry stocks featured in the 2016 Initial Public Offering market. Inghams Group raised $596 million at $3.14 a share in one the year’s largest IPOs. Shares in Australia’s leading integrated poultry producer have hovered around the issue price since listing.
New Zealand-based Tegal Group Holdings raised $268 million in a May 2016 issue at $1.39 a share. The producer of frozen and fresh chicken products, and various small goods, is trading at $1.04.
I cannot get excited about either stock just yet. Inghams, the pick of the two, impressed with its FY17 interim result. The company looks marginally undervalued at the current price, but the safety margin is not yet sufficiently large to warrant investment.
I have not done enough work on Tegel to form a considered view. A handful of broking analysts that cover the stock mostly have buy recommendations and a target price of $1.67 suggests Tegel is undervalued. Always beware that a consensus view is based on a few forecasts.
I prefer the takeaway stocks for chicken exposure, principally the NZ-based Restaurant Brands and Collins Food. Both own a large number of KFC stores and are expanding their global footprint. Both look interesting at the current price.
Granted, KFC consumers are not buying fried chicken, burgers and nuggets for their health properties. My young kids refer to KFC as ‘Kid’s Fattening Centres’, a term they picked up at school and one that so far, thankfully, has deterred them for eating the product.
I last covered Restaurant Brands NZ for The Bull in September 2016 at about NZ $5.50. The stock has mostly hovered around that price, despite some solid operational gains.
To recap, Restaurant Brands has 215 stores: 131 KFC stores in NZ and Australia; 37 Pizza Huts, 25 Starbucks and 20 Carl’s Jr Stores (a US hamburger chain). Restaurant Brands serves around 60,000 customers in NZ each day.
Restaurant Brands announced a solid fourth quarter FY17 sales update last month. Its KFC operations in NZ had same-stores sales growth of 7.1 per cent and profit margins were higher than expected. The Australian KFC operations, acquired last year, are trading above acquisition expectations with 8 per cent same-stores sales growth.
The company’s smaller franchise systems also performed well. Starbucks had 6.6 per cent same-stores sales growth and seems to be getting some momentum back.
But the delayed settlement of Restaurant Brands’ Hawaii acquisition (it is buying Pizza Hut and Taco Bell stores there) caused it to issue FY NPAT guidance toward the bottom of its NZ$30-$32 million range.
Chart 1: Restaurant Brands (listed in NZ)
Restaurant Brand’s Australian KFC rival, Collins Foods, has impressed with solid operational gains and recent KFC acquisitions in Europe.
Collins owns and operates 191 KFC outlets and 22 Sizzler restaurants in Australia, and 65 franchised Sizzlers in Asia. It also owns the emerging chain, Snag Stand.
Collins has growing international ambition. It acquired 11 KFC restaurants in Germany in October 2016 and 16 KFC outlets in The Netherlands in March 2017. A successful $54.4 million placement followed to fund the deals.
The company’s Australian KFC operation, its main earnings driver, is improving after an investment program. After-tax net profit rose 17.2 per cent to $15.4 million. New product offerings, value offers and other innovations are driving sales.
Sizzler is starting to deliver improved results. The all-you-can-eat dining chain, a problem franchise for years, is small in the overall scheme of Collins’ earnings (Sizzler’s first-half FY17 underlying earnings was $2 million).
Sizzler Asia is more promising. Two restaurants opened in Thailand and other two in China in the first half and royalty revenue rose 15 per cent. A further two new Sizzlers in Asia are planned in FY17 as more consumers there embrace the concept.
Collins’ offshore expansion strategy has merit. Fast-food franchise markets for chicken in Germany are fragmented. Collins believes it can open 4-5 KFCs in Germany in the next two years, then 10 outlets per year after that.
The Netherlands acquisition adds scale to Collins’ European footprint and, like Germany, is an underpenetrated, attractive market for KFC outlets. The acquisition is expected to be earnings-per-share accretive for Collins in its first full year.
Collins and Restaurant Brands stack up for long-term investors who want to add small-cap exposure to their portfolio. KFC has plenty of upside as home delivery of its chicken picks up through online ordering services and mobile technology.
Changing consumer tastes for white meats, ongoing growth in fast-food consumption and scalable international expansion programs characterise both stocks.
Of the two, Collins looks marginally better value after a 20 per cent price fall this year, as the market digested its offshore acquisitions and capital raisings. Collins ran too far, too fast, more than trebling from its 2015 lows.
A price pullback was inevitable and may have further to run as the market waits for more evidence about acquisition implementation.
Chart 2: Collins Foods
Source: The Bull
Tony Featherstone is a former managing editor of BRW and Shares magazines. The information in this article should not be considered personal advice. The article has been prepared without considering your objectives, financial situation or needs. Before acting on the information in this article you should consider its appropriateness, regarding your objectives, financial situation and needs. Do further research of your own or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at April 6, 2017.