Investors ponder whether Tegel can 'do a Scales' after pricing IPO near bottom of range

Wednesday 20th April 2016

Tegel Group Holdings' share sale has at least some passing similarities to that of Scales Corp, which went public in 2014, selling shares at the bottom of its range in an IPO that left its major shareholder with a significant stake. The question some investors are asking is could Tegel also over-deliver.

Scales stock has more than doubled since its 2014 initial public offering, delivering a massive gain for Kiwi private equity firm Direct Capital, which had acquired most of the company three years earlier from South Canterbury Finance for $44 million and retained a 20 percent stake in the IPO. New Zealand's biggest apple exporter more than doubled annual profit in its latest year by selling higher-margin apples in key export markets.

"Scales wasn't priced at a premium and the company has delivered," said Paul Richardson, chief investment officer at Mint Asset Management. "The debate about Tegel is whether it is a solid company or a growth company."

Given the volatility in financial markets, "the fact that it has got to market at all is a big tick," he said.

New Zealand's biggest poultry business is being taken public by its second private equity owner after Affinity Equity Partners acquired Tegel in a leveraged buyout from Pacific Equity Partners and ANZ Capital in early 2011. PEP had, in turn, bought Tegal from HJ Heinz in 2005.

The IPO managers Deutsche Craigs, Goldman Sachs and First NZ Capital had to drum up appetite for Tegel shares in a stock market that Blomberg News reported this month was Asia's most expensive. Added to that was the negative factor of Tegel's private equity ownership in a market where the Dick Smith retail chain has suffered a very public demise after being taken public by Anchorage Capital Partners in 2013.

Dick Smith was put into receivership in January, two years after an IPO that valued the company at A$520.3 million, compared with the A$115 million that Anchorage reportedly paid for the business in 2013.

Tegel's $1.55 a share price is just above the bottom of the indicative $1.50-to-$2.50 range. None of the capital raised will go directly into growing the company. Some $132 million will be used to repay bank debt, and between $129.6 million and $163 million will pay out existing holders of Tegel's redeemable shares. The remaining $22.5 million to $25.3 million will cover IPO costs, including an $8 million bonus for senior management.

Affinity is reducing its 87 percent stake to about 45 percent through the offer, with at least half to be held in escrow until the company's 2017 results. It could sell up to 50 percent of its holding after the first-half results, provided Tegel's shares spend 10 consecutive trading days at least 20 percent higher than the offer price.

Chairman James Ogden said in the offer document that identifying and entering new and growing export markets was part of Tegel's growth strategy. Its projections show export sales are projected to rise to 25 percent of total revenue over the next five years, from 18 percent this year. It will target the Philippines, the Middle East, Japan, Singapore, Korea and Taiwan, adding to existing markets in Australia, the United Arab Emirates, Pacific Island states and Hong Kong.

"The key for a strong performance from here is their export strategy, building new chicken lines to export to Australia and beyond," said Matt Goodson, managing director at Salt Funds Management. "Conceptually that makes sense. Practically how they do that will be important if people are to expect strong growth in the business."

Goodson said the IPO "was priced fairly and appropriately, and reflects the business we have in front of us and in the prospectus. There is some potential there for growth if they can execute on their strategy."

Tegel processes about half of all New Zealand's poultry in a market where its only competitor of scale is No. 2 ranked Inghams, owned by private equity firm TPG. Smaller players include Brink's and Turk's, and the four companies have about 98 percent share of the New Zealand market.

Poultry is the cheapest meat on sale in New Zealand supermarkets, according to a survey included in the prospectus, at an average $10.96 a kilogram, compared to $19.29/kg for lamb.

Feed such as corn, wheat, soya and barley is the biggest input cost for Tegel and the company says it is aiming to be one of the world's lowest-cost producers by actively managing its feed sourcing and via commodity and currency hedging.

Tegel forecasts a profit of $10 million on sales of $581.1 million in the year ending April 24, rising to $44 million on revenue of $637 million the following year, when it intends to pay a dividend of between 7 and 11 cents per share.

BusinessDesk.co.nz

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