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If you serious about investing in an IPO, here's what you need to know

by , 08 October 2015

Whenever a company announces it's listing on the JSE, there's always a bit of excitement that surrounds the opportunity.

It sounds simple enough to make money off an Initial Public Offering (IPO) doesn't it?

You just stick your cash into a “potentially” good company and hope other investors do the same.

If the hype surrounding a new issue pushes the price up quickly, you can sell on the same day and emerge with a decent return.

But this isn't always how it plays out.

What you need to do before investing in an IPO

You need to be wary if a stock opens below its issue price. Some institutional investors may look to limit their losses by getting out quickly, and this could depress the price even further.

But if you’re thinking of buying into an upcoming IPO on the JSE now and in the future, then the same rule applies as to any other stock:

  1. Do your homework – find out the company’s prelisting statements and future prospects out. The prelisting statement should give you a good idea of the company’s background story.
  2. Is this a profitable company, with great growth prospects that can achieve success from an IPO?
  3. Does the company present an interesting and attractive background which’ll persuade investors to get a piece of the action?

If yes, you may want to get in quickly, then sit back for the ride. If the share price rockets you could cash out early but if you have faith in an IPO long-term prospects, you can sit back and settle in for the long-haul.

So with a few upcoming IPOs ready to hit the JSE, is it worth taking a look and parting with your cash?

High levels of crime means increasing demand for security

In the past two weeks, I‘ve heard a few companies looking to list on the JSE: Asset Managers, Sygnia, residential housing developer Balwin properties, equipment rental and industrial services company, Waco International and security manufacturer, Trellidor.

But I’m going to look at Trellidor.

You see, security is absolutely must-have in South Africa. As you know South Africa has high levels of crime, a growing middle class and constant power outages. This means the demand will grow, even more.

And the African market for security is also growing as a result of urbanisation and growing home and asset ownership.

The only other dedicated security services company is Amecor. While security solution company, Command Holdings listing was terminated.
With minimal competition, there’s a good opportunity for Trellidor to flex its muscles in the security industry.

Trellidor has a clear and profitable strategy that’ll grow its business even further

As I mentioned previously, if you’re thinking of putting your cash in an IPO, you first need to see if it meets the criteria.

Firstly, Trellidor has 17 distributors in 17 African countries.  In Africa, Trellidor are looking to open distributors in Nigeria, Angola, Uganda, DRC and Mozambique. CEO of Trellidor, Terry Dennison reiterated its African prospects…

“Africa has been a focus since 2012. We’re already doing quite nicely there and, in terms of organic growth, we’ll be looking to adding complementary products to our range. The third prong is growth by acquisition where we will be targeting companies that are strategically beneficial to the growth of the company.”

Secondly, Trellidor also has a good track record from 2012 to 2015. Its profit after tax soared 288% to R45.5 million. Trellidor’s free cash flow produced from operations increased by more than 150% to R53.7 million. Gross margin improved from 46.3% to 50.7%, and the return on capital grew from 20% to over 50%.

So yes, Trellidor is a profitable company. It also has a clear strategy focussed on growing its African operations.

Trellidor shares will be offered to investors between 600c and 700c per share. The group also an attractive dividend policy, paying out half of earnings to shareholders – giving it an “attractive dividend yield between 3.5% and 4%”, Business Day reports.

But the one thing that bothers me about this IPO is Trellidor hopes to place 53 million shares representing 49% of its shares in issue. Now why’s the company giving away a massive stake? Only time will tell.

But in closing, I think Trellidor has great potential for investors to cash in on. The demand for security in South Africa and Africa is increasing, which puts Trellidor in a perfect position to continue growing its profits.

For now, this is an IPO that you must keep an eye on and at the right price, it has the potential to be a great buy!

If you serious about investing in an IPO, here's what you need to know
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