A bargain hunter’s guide to the Tegel Holdings Ltd IPO

Credit: river seal

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.

Instead, a stock which I will be focusing my attention on is The Motley Fool's Top Fully Franked Dividend Share For 2016

This "dirt cheap" company. is growing like gangbusters, and trading on a 5.6% dividend yield, FULLY FRANKED (8% gross). With interest rates set to stay at these low levels for years to come, for income-hungry investors, including SMSFs, this ASX company could be the "Holy Grail" of dividend plays for 2016. Click here to gain access to this comprehensive FREE investment report, including the name of this fast growing ASX dividend share. No credit card required.

Motley Fool contributor Rachit Dudhwala has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.