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LEATT Corp. FY 2022 and Update.

Apr 20, 2023

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Date: April 19, 2023.

Stock Price USD 12.00

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Eloy Fernández Deep Research publishes equity reports periodically. All reports are subject to the following disclaimer.

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I own shares of LEATT Corp.

“It is always easiest to run with the herd; at times, it can take a deep reservoir of courage and conviction to stand apart from it. Yet distancing yourself from the crowd is an essential component of long-term investment success.” Seth Klarman.

“The most important lesson an investor can learn is to be dispassionate when confronted by unexpected and unfavorable outcomes.” Peter Bernstein.

Leatt Corp. Results date: March 28, 2023.

After results share dropped by 27%.

Stock price has dropped by 37% since the analysis date.

Revenues

The increase in global revenue is attributable to a 60% increase in helmet sales and a 28% increase in other products, parts and accessory sales offset by a 36% decrease in neck brace sales and a 6% increase in Body armor sales.

Management team says:

“Our own distributors and dealers have had to alter their buying patterns to digest elevated stock levels before they can return to the buying levels that spurred our growth over the last several years. These headwinds and elevated stock levels have begun to filter through in the 2022 fourth quarter. And to directly affect our results for the quarter and year-end compared to 2021”.

Neck Braces

Sales of Neck braces during the 2022 FY were $5.39 million (7% of our total revenues), down 36% compared to 2021 FY.

Sales during 2021 FY grew by 73%, what I consider an overstated figure attributable to COVID-19 tailwinds.

Body Armor

Management Team says:

“The decline was primarily due to an 18% decrease in upper body armor revenue compared to 2021. Again, 2021 was an exceptional year for upper body armor sales, which increased by 85% over 2020. Body armor products accounted for 51%of our total revenues for '22”.

Helmet

Management Team says:

“Helmet sales were a highlight. Revenues for the year totaled $14.48 million, a 60% increase over 2021. Helmet sales accounted for 19% of our total revenues for 2022. We are very encouraged by the market reception of our award-winning MTB and completely redesigned MOTO helmet lineup that all contain our patented 360-degree turbine technology for head and brain protection”.

Other

Management Team says:

“The increase is primarily due to continued strong demand for our lineup of technical apparel design for off-road motorcycle and mountain biking shoes”.

Financial Performance

NWC reached to around USD 35 mm due to a increasing of inventory levels.

Gross margin decreased to 41%. Leatt targe is not be below 40%.

Q4 is a one-off quarter where The Company had some write-offs.

The reserve for obsolescence for the years ended December 31, 2022 and 2021 was USD 105,072 and USD 116,183 respectively.

OPEX items as Salaries and wages, G&A expenses or Marketing increased 17% reducing EBIT margin. I think that OPEX items will be diluted in the future.

Management Team says:

“Operating costs, which were driven by our investments in sales, product development and the marketing of our growing product range and the development of a globally recognized consumer brand”.

Inventory increased around 10% and revenues increased 5% .

Cash conversion cycle has increased for 69 days what is a warning sign.

We have to pay attention to WC management as a corner stone of Leatt investment thesis.

About inventory The Management Team says:

USA Inventory

“Inventory is pretty stable. Obviously now we have plenty of inventory at Leatt USA that we're going to be selling into the market over the next few periods. And because we had a constrained selling environment with inventory that we had already on the water coming into stock for new product, we've now got that inventory in stock, and we can now sell it out”.

Inventory Valuation

“So a big reason for the increase in inventory is just the fact that we've got more product to sell, which is obviously positive. As I said, we had a look at our inventory. Our inventory is now at a very prudent level in terms of valuation. I think we took a deep look at inventory during Q4. So this is all fresh stock that we have available to be able to sell into the market”.

Stock level

“They don't know whether this is 8 months or 12 months. But we are certainly looking forward to we're going to carry on pushing. We're developing new products. We've got some great products in the pipeline, and we're certainly looking forward to being able to return to the kind of stocking levels that we've been able to achieve in previous quarters”.

Distributors

“And I think from what we've seen so far because we have shown some of these products to dealers and distributors at sales meetings. At the moment, although the market is constrained in terms of the current stocking congestion that is out there, new products and things that are a little bit innovative or what dealers and distributors are looking for. So far, just with our customers that we have shown these products to, there's been a very, very good -- very, very strong response in terms of the kind of ordering patterns that they see moving forward once they are a little bit less constrained”.

Growth

Leatt is focused in long-term and sustainable growth through new bigger addressable markets and products.

Management Team says:

Revenues

“Generally, we try to target a double-digit revenue growth. We've been doing that over the last several years. And I think once things start to normalize in the market, we'd certainly like to return to those kinds of levels.

New Markets

“On the MTB side specifically of moving down the mountain. So at the top of the mountain, you kind of the 1%, which is the gravity rider and then you move down into Enduro and all mountain and trail and then at the bottom, you get into the Endurance Marathon cross-country area, which is really where the bulk of riders are”.

“So these are much bigger addressable markets than where we have participated previously”.

“Looking ahead, the second half of '23, we'll see our expansion into new areas in the global MTB and MOTO marketplace, with well differentiated product categories that showcase innovation and our dedication to consumer engagement and adventure. These products sell to large total addressable markets, and we believe that they will appeal to a wide variety of consumers”.

COVID

“We've taken some market share away from some big players. So my thinking is that although -- we've obviously had 2exceptional years, I think the kind of sales that we saw in the last 2 years, I mean, we can get back to those levels based on the new participants that are in the market and also the new segments that we're going to be selling to”.

“We remain confident this will drive long-term growth once dealers and distributors digest excess inventory levels and begin to reorder strongly again. In conclusion, while the current market dynamics are expected to continue for several quarters with varying impacts on the different markets and geographic locations that we sold to. We believe that Leatt as a company and as a brand is resilient and well positioned for future growth and increase shareholder value”.

I expected slowdown in revenues because growth around 40% is not a long-term figure.

In my opinion a low/medium double-digit growth in revenues makes sense keeping in mind that growth in pandemic was overstated by a high level on demand.

Valuation

At date Leatt shares are trading EV 61 mm and 4.4x EV-to-EBITDA

Considering a extremely bear scenario:

Double digit growth in revenues 2023-2027.
EBITDA Margin 2027 18%
EBITDA 2027 22 mm
Multiple 2027 10x

In my opinion Leatt is clearly underpriced.

Risks

Leatt is not a risk free investment, but in my opinion despite a poor results the market had an overreaction at results day mainly by a retail investors effect (Herding effect).

Given that Leatt sells discretionary products, global economic crisis could negatively affect to sales, results of operations, and financial condition.

Leatt inventory could turn on obsolesced due market cannot digested it. It could affect to financial results.

International operations expose to foreign exchange risk and currency fluctuations. Because primary operations in South Africa, a portion of consolidated revenues are denominated in ZAR. Thus, the Company is sensitive to exchange rates of ZAR, EUR and USD.

Shipping, freight costs, tariffs and other could affect to result of operations.

Future events, like legal conflicts or demands, could have an influence on the company reputation.

Products may suffer obsolete by launching of alternatives and substitutes in the market.

Leatt manufacturers are based in Asia and operate under local regulatory framework. Changes in regulations, strike outs and other conflicts could affect result operations.

Leatt has a strong dependence on its capacity to defend patents. The lack of that capacity could have a significant impact on operations. Likewise expiring patents can affect the business.

Leatt trades on OTC Market. Securities on Over-the-Counter markets are less liquid than those on exchanges.

Leatt has a strong dependence on its founder and chairman Dr. Christopher Leatt who plays a key role in the Company operations and is owner of Leatt-Brace® named “The flagship” by the company.

In my opinion it exists a conflict interest on the relationship between Dr. Leatt, Xceed Holdings, Innovate Services and Leatt Corp.

Catalysts

Currently a few analysts cover the Company. Leatt is a small and unknown company. An increasing in number of analyst could raise the share price in the future.

Leatt trades on OTC market. An uplisting could increase exposure and opening it to new investors. Respect to upsliting CEO says:

“It is not a immediate need in terms of raising capital and getting more exposure. But it is something which would be on the cards at the right time”.

Eloy Fernández Deep Research publishes a monthly equity report, specifically the last business day of each month.

Eloy Fernandez also covers financial results and updates of the companies that have been analyzed previously.