4 things you need to know about the Ingham's IPO
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Most Australians would equate the name Ingham's with quality, reputable poultry products. But are retail participants in the company's IPO getting a good deal?
If you've ever been in the poultry section of an Australian supermarket, or even indulged at your local McDonald's of KFC, chances are high that you've sampled products from Ingham's, the country's biggest manufacturer of chicken products.
But when it comes to investing in initial public offers, does the ubiquity/popularity of a product such as those produced by Ingham's necessarily mean the company which produces said product is a quality investment?
This is just one question among many that Morningstar's equity analysis team endeavour to answer in their recently published Inghams Group Limited Pre-IPO Report.
Ingham's is looking to raise between $768 million and $1,121 million from the issuance of 214.7 to 270.8 million shares in its IPO. The indicative price range is $3.57 to $4.14 per share.
The final price is to be determined at the conclusion of an institutional bookbuild.
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There is "a lot to like" about the Ingham's business, Morningstar analysts say. However, they don't believe the Ingham's business possesses sufficient competitive advantages to justify an economic moat.
"In the poultry processing industry, the only potential sources for a moat would be cost advantage or intangible assets, and in our view, Ingham's has not achieved a sustainable competitive advantage in either aspect," the analysts say in the report.
"Investors should read the prospectus carefully before making the decision to invest."
Here are some key points investors should consider before deciding to invest in the Ingham's IPO.
1) Leading market positions
Ingham's enjoys favourable production dynamics, leading market positions in Australia and New Zealand, and the potential to boost future productivity, Morningstar analysts say.
Ingham's vertically integrated business model includes large-scale industrial operations across the entire value chain.
2) Medium-term concerns
Despite continued growth and near-term profit growth opportunities, Morningstar analysts are concerned about medium-term issues--particularly around pricing pressure from Ingham's largest customers.
"Ingham's top five customers account for approximately 55 per cent of sales, and the firm operates on low margins," they say.
3) Management success
Additionally, Morningstar analysts say the attractiveness of the IPO depends on the future success of management to extract cost savings.
Management is targeting total cost savings of $160 million to $200 million over five years from fiscal 2016.
"We believe management will struggle to pass those savings onto shareholders rather than see them competed away to the major supermarket chains through reduced selling prices," the analysts say.
4) Hand over cash before knowing price
The analysts also point out a key problem facing retail investors in the IPO--they are being asked to stump up cash before the final issue price is announced.
"Retail investors may apply for a dollar amount of shares and not a discrete number of shares, since the final issue price will not be known until after the retail offer closes," they say.
"In our opinion, this puts retail investors at a disadvantage, with only institutional investors directly influencing the price."
Nicholas Grove is a Morningstar journalist.
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