The Inghams IPO is being marketed as an opportunity to
get into a growth stock at a reasonable price, but is that actually true?
Inghams is being sold by TPG (a US private equity
group) that should rightly have a poor reputation in Australia after the
disastrous results for those who naively bought shares from TPG in Myer a few
years back.
While there have been a few examples of successful
companies listing on the ASX after being floated by private equity groups,
there are also plenty of examples of private equity groups simply using inexperienced
retail shareholders as cannon fodder. Dick Smith was a recent (and very well
publicized) example of this.
Now, I’m not saying that Inghams is going to be like
Dick Smith, I think the company will be ok, but should you pay the price being
asked?
Inghams is a very low profit margin business that
relies on selling ever more product to increase profit. It is a classic “commodity”
style business that has very little pricing power. It also doesn’t help things
when the major supermarkets decide to engage in price wars on items like
barbeque chickens.
Consumption of chicken in Australia is already at a
very high level and there are of course limits on how high it can go. Further
to this point, Inghams already has a large share of the Australian market, and
as such, opportunities to grow further are necessarily limited.
The marketers of the IPO do of course mention the
potential to increase profit through expansion of the business into new markets
and so on, but you should never pay up-front for things that may or may not
occur.
For me, the price being asked is a bit too high, I’m
not prepared to pay the kinds of multiples being quoted in the IPO documents
and that’s a fairly easy decision for me to make.
