Investing in IPOs can be a hit or miss venture and investors should always be extra wary of market newcomers, but it never hurts to take a glance at these IPOs and pick promising ones to follow for a few reporting periods to see if they’re more than a flash in the pan.
Time to pump the brakes?
The first recent IPO I’m taking a look at today is £1.2bn market cap automotive parts supplier TI Fluid Systems (LSE: TIFS). It is the market leader in production of light vehicle components such as brake lines and fuel tanks for major global manufacturers from its manufacturing base of 123 locations in 29 countries.
While I like that TIFS is a market leader and reckon its investors could do very well if global auto markets stay hot, I see a few red flags that will stop me from investing in it at this point.
The first is the nature of the industry, which sees suppliers constantly squeezed by OEMs to produce greater volumes of parts more quickly and at lower prices. Furthermore, car makers often do not sign agreements to buy a certain volume of suppliers’ output, meaning if global auto sales fall, TIFS and other suppliers are left with expensive facilities, fewer sales and falling operational gearing.
Second, private equity floats always make me nervous, which is why TIFS gives me pause as it was taken public by PE shop Bain Capital, which still owns over 60% of the shares. On top of that the entire £320m raised at admission went to paying down some of the still substantial debt TIFS was saddled with during Bain’s ownership.
Can they repeat their previous success?
Today I’m casting my eye over streetwear retailer Footasylum (LSE: FOOT), which was started by one of the co-founders of JD Sports, is run by his daughter as CEO, and claims the other co-founder of JD Sports as the chairman of the board. Â
The group focuses on the 16-24 age range and seeks to supply them with the latest on-trend products.These come from well-known multinational brands such as Nike, plus boutique brands, and its stable of own-labels. Names such as Glorious Gangsta and Condemned Nation seem pulled straight from some 90s gangster rap track rather than the minds of 50-year-old millionaires from Bury. But it works.
The fancifully named fashion labels are proving popular with the company’s target age group as revenue from fiscal year 2015 to 2017 increased by a CAGR of 37% to hit £147m, with EBITDA up 126% annually over the same period to £11.2m. As the chain adds new stores to its estate and sees a greater proportion of online sales, this trend is continuing with revenue up 33.4% year-on-year to £89.8m in the 18 weeks to December.
Looking ahead, the group will benefit as long as streetwear and athleisure are the name of the game in fashion. And while Footasylum is going up against larger, better financed rivals in catering to its fickle target age group, its small size and ability to quickly stock the hottest products is probably more of a help than a hindrance.
For now, I’m happy to sit on the sidelines and see if current fashion trends have more staying power than previous ones while Footasylum grows into its rich valuation of 42 times earnings.