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Inghams still not a goer

Peter Warnes  |  04 Nov 2016Text size  Decrease  Increase  |  

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Cash will continue to be a comforting companion given global market volatility is almost a certainty over the coming few weeks, Morningstar's Peter Warnes says.


Is TPG Capital a charity? The Inghams IPO has been repriced at $3.15--a 12 per cent discount to the bottom of the original indicative price range and a meaningful 24 per cent from the $4.14 top.

At $3.15, Inghams is still 20 cents above our Accumulate price and in my opinion still to be avoided. The size of the offer has also been trimmed and TPG will retain a 47 per cent interest.

Early scuttlebutt suggested TPG would sacrifice a little chicken breast to get the much larger Alinta Energy IPO away later in the year. Inghams the sprat, Alinta the mackerel.

Parties involved in the Inghams IPO had earlier indicated the book was covered nearer the lower end of the price range. But what was not divulged was the extent of the retail participation which did not reflect genuine demand.

Everyone knows retail clients bid for significantly more stock knowing they will be cut back, and in many instances, decimated. That is unless the institutional support is lukewarm and the retail investor becomes cannon fodder--the dumping ground, as was the case in Dick Smith.

The process demanding retail investors be "on the hook" for a dollar amount before the issue is priced is on the nose.

A few more repricings will send a clear message to private equity and their investment bankers to go back to underwriting issues at a fixed price where their money, not retail investor money, is at risk.

Inghams comes to market at a time when the industry environment is hostile, with a management team lacking industry experience.

The top five in the management team, as shown in the IPO Roadshow document, are all TPG appointees with a cumulative 7.3 years of exposure/experience in the poultry industry.

An oligopoly masks a very competitive industry as the supermarket sector is demonstrating. Coca-Cola Amatil (ASX: CCL) has a large market share but struggles to earn its cost of capital, such is the buying power of Coles and Woolworths (ASX: WOW).

The 60 per cent ex-Inghams market share is controlled by hard-nosed Italian, Maltese and Indonesian operatives. They have industry longevity and are not going anywhere.

Prices are lower now than they were five years ago. Discounting of breast fillets, the premium cut of the chicken, has a waterfall effect on margins. Breast fillets, previously priced in supermarkets at $14.99/kg, are now readily available around $9/kg. You can imagine what drumsticks are worth.

Margins are under severe pressure. The peak selling season is between October and April where wholesale prices should be above $4.00/kg. They are currently in the low to mid-$2.00s.

Prospectus margins, reflecting meaningful private equity cost-out initiatives and driving the forecast "hockey stick" earnings surge, are unlikely to be sustained in the medium term.

Chicken is a fresh product and the less product going to the freezer the better. The freezer equates to lost opportunity or misjudgement. There is little margin in the export market. The margin follows the temperature--highest when fresh, lowest when frozen.

It is critical to match offtake from processing plants with demand to maximise margin and to ensure efficient utilisation of all facilities within the supply chain.

Planning the whole breeder cycle is the key--from the mating, the laying of fertile eggs, the hatchery, the growing and the processing. Effective and profitable management of this cycle requires many years of experience.

Biosecurity is very important--Inghams previous head moved on. Inghams has been stripped of its industry experience and real assets.

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Peter Warnes is Morningstar's head of equities research. Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar.


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