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Surfstitch Group Ltd shares could crash today: Earnings and margins fall

Source: iStock

Multi-media content and swimwear seller Surfstitch Group Ltd (ASX: SRF) seems likely to plunge today, after a disappointing market update. Business conditions and heavy investment required to integrate a new acquisition seem likely to batter the share price, despite the appointment of a new, highly-experienced executive.

Here are the highlights:

  • More challenging trading conditions resulted in higher advertising costs and lower gross margins
  • Due to the recent management changes, integration of recent acquisitions has been slower than expected and will not complete until Financial Year (FY) 2017
  • As a result, Surfstitch expects pro-forma Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) for the year ending 30 June 2016 will be between $2 million and $3 million
  • Surfstitch remains committed to consolidating its three content platforms into one and believes this is the best way to deliver on its growth strategy

Surfstitch has also hired a new Chief Operating Officer (COO), Mike Sonand, who has formerly worked with Charles Parsons Group, M Webster Holdings, and Globe International.

The announcement is all the more shocking when compared to EBITDA of $7.7 million earned in the 2015 financial year, and company forecasts of  ‘growth of 100% +’ to EBITDA of between $15 million and $18 million in FY 2016.

Prior to opening, Surfstitch had a market cap of $283 million, according to Google Finance. That looks quite elevated given Surfstitch’s updated forecast EBITDA earnings this year.

But what about a takeover bid?  

Investors hanging on for a private equity bid are likely to be disappointed as well, with today’s update virtually guaranteeing that any eventuating bid will be substantially lower. The timing of former Managing Director Justin Cameron’s departure – just over 6 weeks ago – is also beginning to look suspect.

A hefty fall in the value of shares today might change my thesis on the company (by changing the risk-reward trade off), but at today’s prices I believe the company is expensive and very risky. Watch out below.

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Motley Fool contributor Sean O'Neill 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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