Tegel Holdings Ltd (ASX: TGH) is unlikely to be known by many Australians, given its heritage roosts in New Zealand (pun intended). The poultry giant is expecting to be dual listed on the Australian Stock Exchange (ASX) and New Zealand Stock Exchange (NZX) on 3 May 2016.
Here's what you need to know.
What is it?
Tegel is New Zealand's leading poultry producer, headquartered in Auckland. The group produces poultry and manufactures processed meats, rivaling Australian owned Steggles and Ingham.
Who is selling?
Private equity firm Affinity Equity Partners is selling down its 87% stake in Tegel at NZ$1.55 per share. In a surprising move, Affinity will sell 30% of its stake at the lower end of guidance (which ranged from NZ$1.55 to NZ$2.50), in order to ensure a high-quality share register on listing. Currently, the offer is oversubscribed at this price, indicating strong demand on listing.
The move to accept a lower price with higher quality investors is seemingly to dispel market concerns towards private equity floats, given the disastrous run of past ex-private equity floats like Dick Smith Holdings and Spotless Group Holdings Ltd (ASX: SPO). Affinity's decision should therefore bode well for Tegel's share price in the short term.
Affinity will retain approximately 45% of the company following the float, providing sufficient "skin in the game" for any prospective investor.
Should you buy?
Tegel operates in a niche industry with high barriers to entry, has favourable macroeconomic tailwinds and is profitable.
The group forecasts a rise in net profit to NZ$44 million next year (from NZ$10 million), with expectations of paying its first dividend next year of between 7 – 11 cents per share. At an IPO price of NZ$1.55, this places Tegel on a robust forward yield of between 6-7%.
From a fundamental standpoint, Tegel appears to tick all the right boxes. However, the decision to purchase should not be based on forecasts alone, given the crux of a good business is its ability to execute on promises.
How do I buy?
IPOs are bittersweet; some of the best IPOs (aka "hot stocks") are limited to institutional and sophisticated investors meaning ordinary members of the public (like us) are unable to buy the stock at the issue price. With no general offer being provided, Tegel is an example of a hot stock.
On listing, "hot stocks" often surge as a result of pent up demand by the general public (and scale-backs), allowing institutional and sophisticated investors to make a tidy profit. Beacon Lighting Group Ltd (ASX:BLX), Baby Bunting Group Ltd (ASX: BBN) and Wisetech Global Limited (ASX: WTC) are examples of where this has occurred in the past.
Therefore, retail investors wanting to buy Tegel will need to wait in line on day one to purchase the shares once listed.
Foolish takeaway
The issue with buying on-market post-listing is that retail investors are often left paying inflated prices for a piece of the action on day one. Whilst those prices may be justified in the long term, it can sometimes backfire terribly in the short term. Just ask those investors who bought Vitaco Holdings Ltd (ASX: VIT) on day one at $2.52 (which was issued at $2.10 to select investors) to tell you what I mean.
Accordingly, despite Tegel being oversubscribed at the bottom end of guidance, I won't be running around like a headless chook to buy the stock on opening day.
