Although it's early days yet, an investment in NZ poultry company TEGEL GRP FPO NZX (ASX: TGH) ("Tegel"), has so far not been a joyous one for shareholders.
Tegel shares are down 30% in the past 11 months since its debut, after profit margins declined due to an oversupplied poultry market, part of which could probably be blamed on the recent Initial Public Offering (IPO) of Inghams Group Ltd (ASX: ING), one of Tegel's largest competitors.
At today's prices, Tegel shares are trading on approximately 12 times their estimated full year earnings.
Is that cheap?
Sort of. It is low compared to the market, which has an average Price to Earnings (P/E) ratio of around 16. However, it seems high when you consider the company has a profit after tax margin of 5.1% and that the primary driver of profit 'growth' in the last half was lower interest expenses. With that in mind, Tegel is too expensive for my liking even at its current beaten-up price.
It's true that the company has some promising growth opportunities in Dubai, the Phillipines, and even in Australia. Growth with low profit margins is still growth, even in a competitive industry. Tegel also expects its margins to recover somewhat as an oversupply in the poultry market eases in the next few months. Additionally, the company has an opportunity to grow its market share in Australia at the expense of incumbents like Inghams, Steggles, and Baiada. There are good reasons to own Tegel shares.
However, the goal for shareholders is not just to own a company that is growing (although this is good), it is to own a company at a price that offers a decent chance of it being a good investment. I do not think Tegel shares offer that yet, and it would take another 20% or so discount to get me interested in Tegel.
There are many unknowns including the company's ability to compete with low-priced poultry overseas (although in my personal experience, Tegel holds up very well in this regard), as well as the potential for further margin pressure if Tegel has to compete on price to win customers in Australia. For that reason I'm holding off for a lower price, which would give me greater certainty of seeing a positive outcome from buying Tegel shares.
