Sector financial performance:

This company, who primarily produces and process chicken, has been grouped in Meet processing – chicken sector of food industry.

While demand for chicken products of companies in this sector seems to be still not strong, demand may be picking up as indicated by signs from both increase in sales volume of them and rebounding selling price of their products. Backed by increasing sales volume and, to less extent, by rising price, sales of those companies has been growing in the past two years (annual 4-5% growth) as compared with  negative revenue growth ( -7%-0%) in 2016 and 2015.

Profitability of companies in this sector seems to be directly related with price and input costs of live stocks(feeding costs and live poultry costs). Between 2015 and 2016, continuingly declining selling price of chicken resulted from imbalanced supply and demand significantly hurt margin of companies while input cost such as feeding grain price declined as well. While we have seen improved margin in 2017 from those companies as a result of bouncing back of price and benefiting from renewed future contracts of feeding commodity, the margin turned to go down again as selling price went down and input costs went up in 2018. Therefore, most companies have been seen shrinking margin and cash flow in the past several years due primarily to declining price with weak demand behind it. And the current typical gross margin is about 12% with 5% SG&A and 6% operating margin.

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Company performance:

Demand (driven by beefs products) seems to rebound since 2017 compared with 2016 as indicated by increase in both volume and price

For fiscal 2018 compared with 2017 (ended 20180930)

Sales increased 4.7% because Sales volume increased 2.5% (beefs) and average selling price increased 2.1%.

For fiscal 2017 compared with 2016 (ended 20170930)

Sales increased 3.7% because Sales volume increased 1% and average selling price increased 2.7%.

For fiscal 2016 compared with 2015 (ended 20160930)

Sales decreased 11% because Sales volume decreased 4.6% and average selling price decreased 6.5%.

Sales fluctuated by 10% (-10%) in 2016 and 2015 mainly because there is an additional week in 2015 year. However, the -6.5% of (-10%) decrease in sales of 2016 was attributed to the decrease in average sales price for all segment including chicken and beef in that year. The 5% of the 10% increase in sales of 2015 was a result of the increase in beef’s price in that year.

Although sales declined, this company still managed to improve its gross margins (lower input costs including live cattle and hog costs and feeding costs) in both 2016 and 2015. However, with increasing input costs and slowing down of increase in volume in 2017/18, its gross margin went down compared with 2016/17 (about 13% currently).

Stock price

Our valuation methods and analysis indicate that this stock is currently relatively undervalued by the market with its current enterprise price/EBI ratio of 15.