A friend complained that his family eats chicken most nights of the week. Crumbed chicken, stir-fry chicken, barbeque chicken or a derivation thereof. When chicken is off the menu, pork takes over. “We eat far less beef or lamb these days,” he lamented.

At my local shopping centre, the butcher is closing and moving to another suburb after years of service. High rents and waning demand (in part due to the butcher’s pricey meat) have forced him to a cheaper location. The chicken shop next door is thriving.

In the fast-food sector, chicken outlets are increasing their share. Witness the solid same-store sales growth of Collins Food in Australia and Restaurant Brands in New Zealand, both owners of KFC stores and benefiting from rising chicken demand.

A few anecdotes, of course, hardly make the case to buy poultry stocks, such as Ingham’s Group or Tegel Group Holdings. Official data is far more compelling. White meat consumption in Australia continues to increase its lead over red meat. Chicken remains the king of meats and pork has overtaken beef.

Australians each consumed 43.5 kilograms of chicken in 2015, latest statistics from the Australian Bureau of Agriculture and Resource Economics show. In the 1970s, we consumed less than 18 kilograms of chicken each year, often around the traditional Sunday “roast chook”.

Pork consumption is also rising. Australian ate 27.9 kilograms of pork per person in 2015, up from about 12 kilograms in 1975. We now consume slightly less beef each year than pork and the gap is expected to widen as Australians favour white meat.

Three factors are underpinning growth in white meat. First, production efficiencies are making chicken prices more attractive compared to alternative meats. Try buying a kilogram of good-quality beef these days without your wallet groaning.

Second, clever marketing from the chicken and pork industries has reinforced white meat’s health benefits over competing meats. Never mind that much chicken and pork is consumed in unhealthy meals (fried chicken, anyone?). The benefits of lean chicken and pork are tapping into to a general move towards healthier eating options.

The third factor is changing consumer tastes and pallets. Encouraged by the boom in TV-cooking shows and celebrity chefs, consumers are favouring white meat in dishes. Also, immigration growth is presumably supporting pork demand given the meat is more prevalent in many overseas cultures than it has been in Australia.

These trends are mirrored overseas. World chicken meat production grew 36% in the previous decade, according to the Australian Chicken Meat Federation. The coming boom in the Asian consumption, with another two billion consumers expected to join the middle-class by 2030 on OECD forecast, is good news for global chicken demand.

I have been bullish on agribusiness for The Super Switzer Report for some time, favouring stocks such as Costa Group (CGC), NuFarm (NUF), Treasury Wine Estates (TWE), Rural Funds Group (RFF) and more recently Graincorp (GNC). Australian agribusiness will be one of the great beneficiaries of rising Asian middle-class consumption and is among the more attractive sectors over three to five years.

Poultry stocks play into the agribusiness theme and ASX finally has a few to choose from with Ingham’s and NZ-based Tegel Group (TGH) listing last year through Initial Public Offerings.

Ingham’s Group

The nation’s biggest chicken producer had a rocky time in the lead-up to its float and in the early aftermarket. Ingham’s (ING) private equity owner, TPG, cut the IPO’s issue price to $3.15, well below the first price range of $3.57-$4.14 a share, after fund-manager pushback.

Ingham’s eventually raised $596 million and listed in November 2016. It touched $2.94 in early January 2017 and only briefed traded above the issue price after a better-than-expected interim result in February. From a $3.46 high, Ingham’s has eased to $3.12.

Chart 1: Ingham’s

Source: ASX

Tegel has disappointed, falling from a $1.39 issue price to $1.10 after raising $268 million and dual-listing on ASX in May 2016.

Chart 2: Tegel 

Source: ASX

Fund managers are wary. Ingham’s private equity ownership was the first red flag for some investors. The chequered performance of private-equity-vended floats in Australia (there have also been stars, such as JB Hi-Fi (JBH) tempered enthusiasm towards Ingham’s.

Another concern is the maturity of Australia’s chicken industry (how much poultry can we eat?) and the bargaining power of a handful of Ingham’s customers, such as the supermarkets and KFC. Selling a commodity product with limited pricing power, in a slowing market, is tough.

Moreover, there are fears that Ingham’s has extracted most of the near-term efficiency gains through newer technologies, such as automated deboning systems that extract the meat from the bird’s carcass without human intervention. Instead of humans butchering more than 100 chickens an hour (and apparently suffering hand injuries), machines can do more.

At face value, these fears suggest another private equity firm floating a business at the top of the cycle and leaving little on the table for new investors. There is some truth to these concerns, but also more to Ingham’s than the market may realise.

Ingham’s has 40% market share in Australia, operations across the entire poultry value chain and a stockfeed business. About 87% of sales are from poultry; mostly chicken with turkey contributing about a fifth of poultry revenue.

The Australian poultry industry has favourable traits. Domestic chicken demand can be met only by Australian and New Zealand producers because of biosecurity regulations that restrict chicken imports from other countries, in turn reducing competition.

Second, as a grain-fed crop, chicken is less affected by the vagaries of weather compared to other agriculture. The poultry sector tends not to have the same supply or price volatility that characterises many crops and makes them harder to invest in.

Production economics in poultry are improving. Better breeding techniques, improved feed and nutrition technology and enhanced supply-chain efficiencies are helping the big producers pump out more chicken at lower cost. Efficiency gains are making poultry prices more attractive compared to alternative meats and boosting demand.

Cost savings are a key part of the Ingham investment thesis. Its Project Accelerate multi-year transformation program is well-established and seems to be making headway judging by Ingham’s better-than-expected interim result in February.

Less considered is Ingham’s potential to supply higher value-added chicken products. Processed chicken products that are marinated, crumbed or both – and sold in boxes in supermarket chillers – offer higher margins and help diversify Ingham’s sales channels. Expect free range and value-added chicken products to become a much bigger part of the sales mix over the coming decade.

Ingham’s underlying earnings (EBITDA) for the first half of FY17 rose $9.1 per cent to $95.2 million, suggesting Ingham’s is on track to meet or exceed prospectus forecasts.

Strong growth in poultry demand came from retail and quick-service-restaurant demand, and offset weaker results from New Zealand because of poultry oversupply. Challenging trading conditions in NZ are one reason why I favour Ingham’s over Tegel, which has higher market share in NZ than Ingham’s.

Nevertheless, Ingham’s has many challenges. Relying heavily on a handful of big customers is not ideal for any business, let alone one in a low-margin, commoditised industry. On some broker estimates, Ingham’s top five customers account for up to 60% of its revenue. Sales concentration invariably weighs on profit margins and creates risks.

Greater pressure from Woolworths and Coles on poultry producers could whittle away efficiency gains from Ingham’s transformation programs. Put another way, Ingham’s will have to find more cost savings just to stand still, if margins are pressured.

Agricultural and disease risks are an ever-present threat for poultry, but there has been limited incidence of sustained salmonella outbreaks or other reasons to cut chicken consumption. If anything, Ingham’s has less risk in this regard than several other producers.

Risks aside, Ingham’s should benefit from continued growth in poultry demand, albeit slower from here, and a favourable industry/regulatory structure. The company’s market position ensures it secures long-term, multi-year contracts and its scale provides a cost advantage over small producers.

To be clear, I don’t see Ingham’s taking off like some other agribusiness stocks, but nor should it have similar volatility or be as hostage to livestock cycles and prices. Done well, Ingham’s should be a steady business that slowly expands margins at a time of high and rising chicken consumption – and a lower-risk way to play the agribusiness theme.

Macquarie Wealth Management has a $3.65 price target over 12 months and Morningstar values Ingham’s at $3.50 a share. An average share-price target of $3.68, based on the consensus of eight broking firms, suggest Ingham’s is undervalued at $3.12.

Ingham’s is no screaming buy. But the market may have dismissed Ingham’s maiden half-year result too quickly and its long-term prospects as chicken demand rises.

Granted, higher chicken consumption will not please my friend who is yearning for red meat. But it’s good news for investors who want exposure to the poultry industry as chicken continues to slaughter beef and lamb.

Tony Featherstone is a former managing editor of BRW and Shares magazines. All prices and analysis at May 3, 2017.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.