If Red Rooster-owner's 8.6 per cent to 9.3 per cent dividend yield sounds too good to be true, that's because it is.
Well, at least for those taking a longer term view.
As fund managers dig into Red Rooster and Oporto parent company Craveable Brands' pathfinder prospectus, they have found a simple explanation for the eye-catching dividend yield.
While Craveable Brands is priced for a 8.6 per cent to 9.3 per cent dividend yield based on 2018 financial year forecasts, it is expected to normalise around the 6 per cent mark once the company uses its tax losses.
Craveable Brands is seeking to come to market with $106.3 million in carried forward tax losses, worth $31.9 million on a tax effected basis, which is a legacy of its private equity capital structure.
Those losses are expected to transfer to the listed entity with no change of business between Craveable as it is today and as it would be if it lists as planned on July 13.
And that means the company would pay no income tax in the 2017 and 2018 financial years.
It was a similar story at Alinta Energy when it was lining up for a float in the second half of last year and had about $400 million in tax losses at its disposal.
While 6 per cent is a shy of the near-term yield, it would be tempting for fund managers and retail investors. Craveable Brands is targeting a 75 per cent to 85 per cent payout ratio, based on net cash flow.
It is understood Craveable Brands' pathfinder prospectus also shows IPO proceeds would be put towards repaying private equity shareholders Archer Capital and Partners Group, which have $189.3 million in shareholder loans in the business.
The pair is not expected to sell any shares as part of the float, rather take some money off the table via the shareholder loans and retain their equity stakes for at least another 12-months.
[Archer entities have an 89.1 per cent pre-IPO stake, while Partners Group entities own another 7.4 per cent.]
It explains how Archer can retain half of its economic interest in Craveable Brands by keeping only about a 30 per cent equity stake.
