Ingham’s IPO – One to avoid despite the hype

Key Facts

  • Ingham is one of the largest vertically integrated chicken manufacturers in Australia and New Zealand. It holds the #1 and #2 positions in Australia and New Zealand’s chicken markets respectively (40%, 34%).
  • Indicative market capitalisation is $1.3 to $1.5 billion based on indicative price range of $3.57 to $4.14 per share.
  • The range values Ingham at 13.5 to 15.5 times its pro forma 2017 net profit. By way of comparison, Tegel trades at a multiple of 12 times, and Costa 17 times FY17 earnings.
  • Implied forecast yield for FY17 dividend is either 5% or 4.4% (depending on final share price of $3.57 or $4.14).

Reasons for Investing or Avoiding?

Various investment reasons and key risks are presented in the prospectus but the key points to consider before deciding to invest in the Ingham’s IPO are:

Investing:

  • There are robust growth opportunities as poultry is the most consumed source of animal protein in the developed world. Total volume of poultry consumed has grown at approximately 5.1% (compounded annual growth rate).
  • Strong financial performance – Ingham’s FY16 pro forma EBITDA was $167.5 million and forecast to increase by 13.5% to $190.1 million in FY17. This is a big assumption that relies heavily on organic growth and improvement to efficiencies (thereby cost-saving).

Avoiding:

  • Highly sensitive to shifts in industry demand – e.g. During FY16, Ingham’s top five customers accounted for approximately 55-60% of Ingham’s sales revenue. If contracts are exited or not renewed, this could adversely affect Ingham’s profits which are already at low margins.
  • Significant changes in consumer trends – e.g. increased focus on animal welfare could mean that there are increased feeding and product development costs.
  • Ingham will float at a price above Morningstar’s ‘Fair Value’ estimate of $3.50 (see article here)

Who benefits the most out of this IPO? Answer: TPG

Let’s have a look at TPG’s investment timeline:

In March 2013, global private equity firm TPG bought Ingham $880 million -$880m
Sold properties worth $540 million +$540m
Outstanding Balance from Investment -$340m
TPG selling 50-70% of stake in Ingham through IPO (7/11/2016 deferred settlement commences) +767.6m – +1.1 billion
Potential TPG profit in 2016 427.7m or 760m

For around 3 years of investment, parting with 427.7m or 760m whilst retaining a minimum 30% ownership in the company is not bad, it’s great… for TPG that is.

Foreseeable Selling Pressure from TPG

  • Even if the share price performs well subject to financial year results, market demand and final IPO price, it is likely to come under significant selling pressure from the parties listed below in the near to medium term.
  • After release of half year results for Ingham, 33% of TPG’s shares will be released from voluntary escrow. Shares will only be released if the share price is 20% or more above “final price” of IPO.
  • All shares to exit escrow on the release date of Ingham’s full year report.
  • Similarly, management will have their shares escrowed for minimum 1-2 year period (3.2% of total shares on issue on completion of offer).

Conclusion

While there are certainly growth prospects and positive return to be found by investing in Ingham, there are a lot more warning signs that cannot be ignored. Instead of paying cash upfront before a final issue price is announced and not receive a discrete number of shares, there’s always the option to purchase shares after listing on the ASX. And for the implied yield that Ingham offers, one could do better to put their money elsewhere.

References:
Ingham IPO prospectus
http://www.fool.com.au/2016/10/17/should-you-buy-into-the-upcoming-float-of-inghams-group-limited/
http://www.smh.com.au/business/markets/inghams-poultry-could-be-this-years-biggest-ipo-as-private-equity-firm-tpg-prepares-15-billion-float-20161012-gs0luh.html
https://www.belldirect.com.au/smarter/inghams-ipo
http://www.morningstar.com.au/stocks/article/things-you-need-to-know-about-the-Ingham-IPO/8084
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