Inghams leverage rises above target after FY26 profit collapse

Revenue Growth Fails to Translate Into Earnings

Inghams Group Limited (ASX:ING) grew its core poultry volumes by 1.9% in FY26, but the recovery in demand was overwhelmed by costs. Revenue rose 2.4% to $3.23 billion, while statutory EBITDA fell 24.2% to $297.3 million and net profit after tax plunged 61.5% to $34.6 million. Basic earnings per share more than halved to 9.3 cents.

The company’s preferred operating measure was no brighter. Underlying EBITDA before AASB 16 declined 21.2% to $186.4 million, while underlying NPAT before AASB 16 dropped to $56.6 million from $95.2 million. Management said second-half underlying EBITDA before AASB 16 improved to $106 million, up from $80 million in the first half, citing its operational reset and cost initiatives.

Cost Inflation and Tax Dispute Weigh on FY26

Lower feed costs and $82 million of continuous improvement and procurement savings did not offset inflation elsewhere. Inghams reported approximately $50 million of embedded inflation and a further $13 million in transport and packaging costs attributed to the Middle East conflict during the second half. Cost pressure was particularly visible in freight, packaging, labour, repairs and maintenance, ingredients and cooking oil.

The annual report also sets out the financial exposure from an Australian Taxation Office dispute over research and development tax offsets claimed for 2019 to 2021. The ATO’s amended assessments were approximately $8.5 million for each year, and Inghams has recognised a $12.7 million provision while objecting to the assessments and preparing to contest the matter through litigation if necessary. That provision was excluded from underlying NPAT, meaning the underlying measure remains dependent on management’s chosen adjustments.

Horizon Strategy Turns from Volume to Value

The results formalise the challenge already facing the business: volume is returning, but volume alone is not producing acceptable returns. In May, Inghams outlined its value-led turnaround strategy, and the annual report places that plan into three phases: Stabilise, Optimise and Grow.

The strategy prioritises product mix, customer service, planning discipline and extracting more value from existing assets before expanding into premium brands, pet food ingredients and value-added poultry products. Inghams invested $50 million in automation across Australia and New Zealand, expanded Bostock Brothers’ weekly processing capacity by 40%, and commissioned a $12 million Somerville facility producing bulk frozen blocks for pet food manufacturers.

Debt Falls as Leverage Moves Above Target

Cash generation provided one of the few clear financial offsets. Operating cash flow was $313.7 million and cash conversion reached 105.5%, helping net debt fall $27.1 million to $403.3 million. That improvement did not prevent leverage from rising to 2.2 times underlying EBITDA before AASB 16, above the company’s 1 to 2 times target range because earnings fell faster than debt.

Shareholders received 10.1 cents per share in fully franked dividends for FY26, a 70% payout ratio, including a final dividend of 6.1 cents. The board has also introduced a dividend reinvestment plan. From FY27, leverage will be added to the short-term incentive scorecard, while management’s FY26 incentives were reduced to zero after the board considered the financial and share price performance.

Bird Flu and Climate Targets Add Execution Risk

Biosecurity remains an immediate operational risk. H5 avian influenza was detected in Australia in late June and New Zealand in July, prompting heightened protocols, including voluntary housing of free-range birds, restricted site access and additional cleaning. Inghams said there had been no detection in commercial poultry, including its own operations and supply chain, at the reporting date, but warned that extended confinement could affect free-range certification.

The company’s first mandatory climate-related disclosure adds another longer-dated test. Scope 1 and 2 emissions were down 15.7% against the FY19 baseline, but Inghams acknowledged it was lagging the trajectory needed to deliver its 46.2% reduction target by 2030. It expects to develop an emissions reduction plan and Climate Transition Plan during FY27, while also assessing water vulnerability at its largest water-using facilities.

FY27 Must Convert Operational Reset into Margin

Inghams is therefore asking investors to value the direction of travel while absorbing a materially weaker earnings base. The incoming CFO, Grant Douglas, is due to take over from Gary Mallett in October, and the company has committed capital to automation, convenience products, pet food and premium poultry. The unresolved question is whether those investments can lift value per bird quickly enough to offset inflation, biosecurity exposure and leverage that remains above target.