Up 125% since its IPO last week: Is beer company Broo Ltd a buy?

Following a massive 60% rise in its share price yesterday, the shares of newly listed Broo Ltd (ASX: BEE) have now surged higher by an incredible 125% since their initial public offering on Thursday of last week.

This Australian beer company has certainly made waves since it raised $10.5 million through the listing of 52,500,000 ordinary shares at 20 cents each. But should you invest in the company behind the Broo Premium Lager and Australia Draught brands?

I would recommend avoiding an investment in Broo at this stage. Even the company has labelled itself a “speculative investment” in its prospectus and I would have to agree.

Although the company has its eyes firmly set on the lucrative China market, it has yet to commence operating in the country and gaining a foothold there is not going to be easy.

Five companies including global brewing giants SABMiller and Anheuser-Busch InBev already dominate the market and account for 80% of total beer sales in China. Winning market share from these giants will be no easy feat.

Admittedly with a market of that size the company wouldn’t have to win much of a share for it to make a noticeably big impact on its results. But until it has proven that there is demand in China for its products I would suggest investors sit this one out.

After all, it’s not as though the company can rely on domestic sales growth as a selling point for investors. In FY 2016 sales dropped 28.5% to $516,334 from $722,571 in FY 2015. Unfortunately the company has decided against providing any forecasts in its prospectus, so it’s impossible for investors to know whether things are going to improve in FY 2017.

Overall investors that are looking for exposure to the industry would be better served through investments in Australian Vintage Limited (ASX: AVG) or Treasury Wine Estates Ltd (ASX: TWE) in my opinion.

I’ll happily cross my fingers and wish Broo the best in its Chinese endeavours, but I won’t invest any hard earned money in the company at this point in time. I would recommend fellow investors do the same.

Instead these rapidly growing shares could be far better investments. Each has strong earnings growth potential and could be next in line to jump higher in my opinion.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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