Next month’s float of Ingham’s Group Limited will see Australia’s largest poultry producer come to the stock exchange after raising between $767 million – $1.12 billion, as Ingham’s owner, private equity group TPG Capital, sells between 50 –70% of the business, at an indicative price range of $3.57 – $4.14 a share.
The float will value Ingham’s at between $1.33 billion – $1.53 billion, with the enterprise value (equity plus debt) of the poultry producer valued at between $1.7 billion and $1.9 billion.
Macquarie, UBS and Credit Suisse are handling the IPO as global co-ordinators, while Citi, Goldman Sachs and Morgan Stanley are joint lead managers.
The Ingham’s float gives investors access to a very high-quality food business, which holds about 40% of the chicken and turkey market share in Australia – ahead of rival Baiada – and 34% market share in New Zealand. Ingham’s supplies Australia’s biggest retailer, Woolworths, and fast-food chain KFC. Of its $2.28 billion revenue in the 2015 financial year, retail represented 53% of its sales, and fast food chains a further 17%. (Food services and wholesale contribute a combined 15% of revenue, with stockfeed sales making up the balance of 13%.)
Given that poultry is a cheaper source of protein than other meats, and consumption has risen by about 4.1 – 5.1% a year since 1990, according to the Ingham’s prospectus, poultry appears to be a good business to be in, offering a sound defensive investment profile.
But Ingham’s also has good growth prospects, with its strong operating cash flows set to fund both plant modernisation and expansion projects. Ingham’s is reportedly preparing another crack at the $600 million-plus national contract for Coles supermarkets, which accounts for more than 10% of chicken sales, and looking for other opportunities to diversify its customer base.
The prospectus outlines Ingham’s as a margin expansion story, with management one year into a five-year transformation program that the company calls Project Accelerate. The prospectus estimates that organisational efficiencies implemented could bring $160 million to $200 million of gross benefits – to EBITDA, or earnings before interest, tax, depreciation and amortisation – derived across automation, procurement, labour, network rationalisation and supply chain management.
Further out, there are plans for Ingham’s to join the long list of companies taking their brands into Asia and the Middle East, to capitalise on the demand flowing from the strong perception of high-quality “clean and green” produce from Australia. But that is a medium to long-term plan: at the moment exports account for less than 2% of Ingham’s’ business.
Ingham’s projects 18.9% growth in earnings per share (EPS) in the 2017 financial year, and a dividend yield of 4 – 5%, at the indicative price range of $3.57–$4.14 a share. The planned future dividend payout ratio is 65 – 70% of net profit and the prospectus indicates that the FY17 dividend will be fully franked.
That means that a self-managed super fund (SMSF) in accumulation phase could be looking at a yield from Ingham’s Group of up to 6% in FY17, while a fund fully in pension phase could earn 7.1%.
The pricing range comes in at a price/earnings (P/E) ratio of 13.5 times–15.5 times the company’s forecast FY17 earnings, or an enterprise value multiple (which compares the EBITDA to the ‘enterprise value,’ or equity plus debt, of 8–10 times.)
The P/E ratio is below that for the S&P/ASX 200 companies, which stands currently at about 16 times forecast earnings, on average.
Investors looking for a comparison to assess Ingham’s’ pricing will look first to its smaller trans-Tasman rival, Tegel Foods, which listed on the Australian Securities Exchange (ASX) in May. Tegel – a much smaller float – was priced at the lower end of its NZ$1.55–NZ$2.50 range, and was valued at eight times forward earnings, with a total market value of about $NZ600 million. However, Tegel is about one-quarter of the size of Ingham’s and comes from a home market that is growing at a slower rate than Ingham’s’ market.
Investors may also place Ingham’s side-by-side with fruit and vegetable company Costa Group, which listed last year at a value that equated to 18 times its forecast. Costa currently trades on an enterprise value multiple of 11.8 times FY17 EBITDA.
On Ingham’s Group’s forecast numbers, it does appear to be an attractive investment in a market-leading business with a clear path to growth. Obviously it will be more attractive at the lower end of the price range: the final price will be determined at the conclusion of the institutional offer bookbuild process, and is scheduled to be announced on 4 November. Successful applicants will pay the final price.
Muddying the waters for many investors is that Ingham’s is another private equity float, in which private equity investor TPG Capital is the vendor, after having bought the company from the Ingham family in 2014, for $880 million. Investors must understand the modus operandi of private equity, which is to buy a company, invest in efficiencies and hive off any non-core businesses, and sell it through a share market float or a “trade sale” to an operator in the same business.
This is what TPG has done with Ingham’s, for example, Project Accelerate, and the sale and lease-back of much of Ingham’s’ property portfolio to property investors, which is estimated to have generated proceeds of more than $550 million.
This is how private equity makes its money. TPG paid an enterprise multiple of about 4.5 times when it bought Ingham’s: now it is selling it for about 8–10 times EV/EBITDA.
The Australian share market has seen some poor outcomes from private equity sales: the likes of Myer Group, Spotless Group and Dick Smith have been high-profile examples of private equity exits that did not do many favours to investors. Myer – which was sold by TPG – infamously has never traded above its 2009 issue price of $4.10: it closed its first day at $3.75 and currently trades at $1.17, up from a low point of 87.5 cents in September 2015. (TPG was not involved in Spotless Group and Dick Smith).
These IPOs – especially Myer – conditioned investors to think that the private equity vendors look to maximise the sale price because it is their exit point, and that ‘buyer beware’ is the best way to approach private equity floats.
More recently, however, TPG was involved in the July 2014 float of private hospital operator Healthscope, after four years in private equity ownership. At $2.10, the $3.6 billion float was widely viewed as expensive, but the stock has risen to $2.94 at present.
On the sensitive topic of private equity exits, two points should be made about Ingham’s Group. The first is that TPG’ is staying on board as an investor: it will keep a 25 – 40% stake.
The second point is that TPG is also involved in the $3.3 billion-plus Alinta Energy float, coming up shortly, in which it holds a stake of between 20 –30%. It is widely felt around the stock market that TPG will price Ingham’s conservatively so to achieve a healthy float premium, so that investors are more likely to back the larger – and potentially more challenging – Alinta Energy issue.
The other aspect of Ingham’s worth mentioning is that despite the sale process not seeking a cornerstone investor, it got one: according to the prospectus, a large Australian superannuation fund bought up to 10% of Ingham’s prior to the IPO. Reports put the super fund’s commitment as up to $150 million, depending on the final price, and at least $100 million across the price range. This buyer has been reported to be industry fund AustralianSuper, one of the country’s biggest investors with more than $100 billion invested on behalf of more than two million members.
Such a commitment should bolster the confidence of an investor contemplating buying into the Ingham’s float.
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