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Wipeout! Surfstitch Group Ltd shares plunge 56% on shock downgrade

Shares in surfwear and multimedia content group Surfstitch Group Ltd (ASX: SRF) have been smashed following a surprise downgrade announced to the market this morning. Investors already faced significant uncertainty over the company after the surprise departure of CEO Justin Cameron just six weeks ago.

(source: Google Finance)

(source: Google Finance)

Combined with today’s announcement, the uncertainty was enough to cut Surfstitch’s market capitalisation by more than half, to $128 million. Although Mr Cameron was reportedly putting together a private equity bid for the business, the effects on Surfstitch’s share price have so far not been positive – and any bid is likely to be well below recent prices of $2, given the content of today’s announcement.

Shareholders likely also have a number of questions regarding the timing of Mr Cameron’s departure, given its proximity (March 10) to today’s downgrade.

Analysts have also been handed a curve-ball in valuing Surfstitch, which still looks vastly overpriced, trading on around 40-60 times full year Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) despite tough trading conditions. On the flip side, significant benefits should be realised in 2017 from recent acquisitions, which could make current valuations obsolete.

Either way, given the uncertainty, Surfstitch’s share price could remain volatile for some time.

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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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