Description

Leatt Corporation

Please note this stock is a sub $150MM market cap and trades by appointment so it's primarily actionable for PAs and small funds.

Investment Summary:

Leatt Corporation designs, develops, and distributes head-to-toe personal protective equipment for mountain motor sport and bicycle riders worldwide.  The company’s products include helmets, chest protectors, upper body protectors, back protectors, knee braces, elbow guards, specialized boots, and biking shoes.  We believe the company is in its early stage of growth, and at the current PPS and macro backdrop, it presents a wonderful opportunity to generate satisfactory returns over the next three to five years.  The following are the reasons that bolster our belief:

• Great entry point at 12.5x 2021 diluted EPS.

• Top line CAGR at 35.1% over the past five years and 43.8% over the past three years.

• Operating margin increased from -4.5% to over 22.9% over the past five years.

• Large insider ownership and a conservative balance sheet.

• Significant investment in inventory likely to drive further growth in 2022.

• The company plans to up list the company to NASDAQ and has no sell-side coverage yet.  

Business:

Dr. Chris Leatt founded the company in the early 2000s to create neck injury prevention PPE.  Over the next decade the company expanded to various head-to-toe products as shown below:

Leatt had initially sold its products into a niche off-road motorsport market.  Since then the company has expanded the distribution into larger adjacent markets with the potential to serve 250 million riders. The company’s products are predominantly manufactured in China under outsourcing arrangements.  The company sells its products in the US and South Africa by its own distribution.  The products are available in the rest of the world through a network of 52 distribution partners.  Approximately 80% of sales are in US and Europe.  With limited product concentration and diverse distributor base and global reach for the company’s products, investors are shielded from any risks due to concentration.  Additionally, the management believes its product superiority is the reason why they could build a global consumer brand and gain market share over competition.  

Investment Case:

We believe investment in Leatt stock can yield satisfactory results due to its undiscovered nature, great setup at current quoted market price, large addressable markets where the company has demonstrable success over past few years and improving leverage with growing sales.  Below is the snapshot of key financial data over past six years.

Leatt products have demonstrated superior safety credentials vs its competition and has differentiated itself by protecting its innovation with patents, which discourages duplication by its competition. The company is making further headway into its markets by forging new partnerships, engaging brand ambassadors to promote the Leatt brand, and investing in inventory.  We believe these actions will further enhance its competitive position.

Also, the supply chain hurdles that the company has been facing are beginning to ease per the company’s latest investor call.  With this development, the company can manage its operations and working capital better, which we believe will be visible in the future financial statements.  

Valuation

We believe Leatt’s products are differentiated by higher level of protection in a recreational or professional activities where safety is a paramount.  The company has been profitable for the past five years and has been growing and expanding its market share without significant demand for external capital.  Operating margins have been ramping nicely during this time even with disruption caused by COVID.   The management has successfully navigated the company during the uncertain period.  We believe reopening of economies will provide some tailwind to the company’s growth.  At current multiple, an investor is not paying for growth in the coming years.  We have no upside target at present.  As mentioned earlier the company plans to list the company’s stock on a major US stock exchange.  Also, with travel opening in the US, the management is marketing the company to new and potential investors beginning this quarter.  We are confident in underwriting at the market multiple on a trailing basis.  That alone will fetch a stock price about $50 per share and there is an additional optionality for double digit growth which will help with further appreciation in the company’s valuation.

Risks

• Global supply chain glitches could cause temporary disruption to the company’s distribution network

• Current COVID situation in China should be monitored closely

Catalyst

• Post COVID reopening 

• Uplisting and additional investor exposure

• Continued execution