Inspecs: A QM Small Cap IPO Missed By The Market

29th May '20 by Jack Brumby

9 comments 3170 reads

How many kinds of glasses frames are there, really? Surely only five or so: round, square, rectangle, those tortoise shell ones, and sunglasses.

I’ve been wearing and losing glasses for more than a decade now, but apparently there’s more to it than that.

That’s what Inspecs (LON:SPEC) would have us think anyway. It’s a recent IPO: a vertically-integrated eyewear frames specialist that licenses, designs, patents, manufactures and distributes globally from bases around the world.

Inspecs is one of only a few companies that can offer a one-stop-shop solution to global retail chains and is well positioned to continue to take market share in a booming global eyewear market. It is also looking to complement this organic growth with acquisitions as well.

This new recruit to the market figures well according to the StockRanks, supported by good quality characteristics and relative strength.

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Some IPOs are disasters, but others (Avast, for example) are just good companies that are too cheap because nobody yet knows them well enough. Avast has doubled over two years or so - perhaps there is scope for SPEC to similarly rerate.

A $130bn+ global market opportunity...

Founded in 1988 and headquartered in Bath, Inspecs is a very international UK small cap with a global opportunity - in FY19, it generated 24.9% of its revenue in the UK and 75.1% internationally. The group has a market cap of c£100m and it says the global eyewear market is worth $131bn - so plenty of growth for years to come, assuming management can execute on the group’s strategy. There is the question of just how much of this c$130bn pie applies to SPEC though.

Data from the likes of Grand View Research, Mackenzie, and Bizwit suggests this market will expand at a CAGR exceeding 7% from 2019 to 2025 as a result of:

Increased awareness regarding eye examinations – there is a global population of 7.7 billion people, of which approximately 4.5 billion are likely to require vision correction and fewer than half have been corrected.
A growing number of ophthalmic disorders such as myopia (short-sightedness), presbyopia (long-sightedness), and hypermetropia among ageing populations.
Continuing improved prosperity in emerging markets leading to increased consumption of fashionable eyewear.
Increasing awareness of the benefits of protecting the eyes with sunglasses against sun, UV and blue light, and the high potential for prescription sunglasses.
Increased digital…

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johnsmith68

29th May '20

Many thanks Jack. Yet another really useful and thought provoking article in a great series of really useful articles.

tim boddington

Superb article thank you Tim B

pj8

Great article, Jack. The catalysts for further growth look impressive/valid. My question would be; who are the competition and what how much of a threat could they be? Is there a USP/moat?

Jack Brumby

Cheers PJ, appreciate it... I'd agree that potential competition is a key risk to investigate further. The company does talk about licenses and patents, but the licenses are five years and the patents I haven't yet been able to look at. I'm not sure how valuable they are, or what they even refer to.

If the market opportunity is sufficiently large, maybe it will take a long time before it begins to feel crowded. There could be plenty of runway for growth even if there aren't any concrete barriers. In the long term though, I haven't found anything that really protects Inspec (for all its talk of barriers to entry).

In the short term, there's also the impact of COVID though. I imagine demand for glasses would be relatively robust, but I don't know that for a fact and the company's certainly guiding to disruption.

Reacher

Very good analysis, Jack, thanks. It's an interesting company operating in an interesting space; I looked at Essilor Luxottica last year but did not pursue it further. It is a market that is growing due to health needs and population growth especially due to longevity.

In your conclusions you refer to diluted EPS being 14.8c. However, did you mean $14.80 as mentioned in the results section?

In addition, I agree that taking the Profit After Tax and dividing that by the bigger share count would give a more accurate EPS figure and this results in 9.2c. However, this needs to be converted into GBP which then results in a higher PE of 29.9.

If the company is partly growing via acquisitions, it's too early to rate management's ability to secure good deals. Paying a PE 29.9 requires placing a lot of faith in management's ability.

Whilst the timeliness of listing is rather unfortunate, it's interesting that directors have taken a 60% pay cut. However, lets not forget that selling shareholders have received £70.53m from the IPO, from which the CEO and CFO received c.£13.6m and c.£3.5m respectively. I always question IPOs with "why now?" and would have preferred to have seen how SPECS can grow into the market rather than grow through acquisition. For me, I need to see more history and demonstration of ability to make good deals in the interest of shareholders before the the valuation makes sense. However, it's going on the watchlist.

Michael Taylor

30th May '20

Good article Jack - I didn't look at this any further when I heard that selling shareholders were cashing out their shares, but it does seem to be breaking out so maybe I should be long.

JSLDUK

31st May '20

Inspecs (LON:SPEC) thanks Jack, Definitely one to keep an eye on (excuse the pun). They have not yet provided much detail on how Covid has impacted their buiness, except saying that they are trying to preserve cash and have taken pay cuts. Also the statement from CEO saying they will be well positioned to benefit from the recovery as a leaner, more efficient business, is slightly concerning given they have only just floated. However their pre Covid performance was strong and suspect people have still been buying eyewear through this lock down especially in the UK with this great weather we have been having. So once more certain about their Covid trade levels, could be one to add.

MiserableJacktPotato

Is the cash balance on the stock report accurate? It says they have $6.6m in cash. They want to grow by acquisition but it appears they haven't used the IPO to give them the cash balance to make acquisitions, so we assume they'll be funded by debt or dilution. For that reason and with the PE at 20 and a likely recession/depression across the Western world looming I'm not sure I want to jump in just now - one to keep an eye on if it heads back towards a PE of 12 or so.

If my thoughts are wrong, please correct me, as I regularly state in my posts, I am an idiot so don't rely on my thoughts.

1st Jun '20

Hey IGPJ,

I think that's right. There are a couple of amber flags that mean I would like to see more from SPEC before making a decision... Off the top of my head:

IPO proceeds being used mostly for existing shareholders to sell down, particularly relevant given your point on cash and the seemingly low liquidity (IIRC it was something like 3/4 of proceeds being used - but I would balance that against the CEO/founder remaining SPEC's largest shareholder)
Possible competition - there are signs SPEC can generate good returns and cash flow, but I haven't seen much that stops competition from pushing in (but also the market opportunity looks to be quite big)
COVID trading - this is a big unknown, especially given the limited operating track record we have of the company. I suggested demand for glasses frames could be resilient but others have pointed out that opticians can sit on unsold frames quite easily. It's not a market I know well, so I need to do more digging here...
The vertical integration the company is so keen to point out seems to be mostly as a result of recent, large acquisition, so the Inspec we are getting introduced to is quite a new entity.

The shares are up again today but on balance I've seen enough to make me hold off as an investor until I've seen some more trading updates. Navigating its way through COVID will be a baptism of fire, let's see how it does. Interesting IPO though.

Inspecs: a QM small cap IPO missed by the market

A $130bn+ global market opportunity...

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Jack Brumby

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