Skydive the Beach Group Ltd shares skyrocket

Skydive the Beach Group Ltd (ASX: SKB) soars 40%, but there's a warning attached

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Skydive the Beach Group Ltd (ASX: SKB) has seen its shares soar as high as 40% on its ASX debut.

Shares opened at 31 cents, well above their IPO price of 25 cents, and soared as high as 35 cents. Shares have dipped slightly since, currently trading at 34 cents in lunchtime trading.

Investors were clearly buoyed by the fact the company is profitable and expects to pay an initial dividend in October 2015.

Skydive began in Wollongong in 1999 but has expanded to include 11 drop zones in 4 states. In the 2014 financial year, the company had more than 40,000 tandem skydive jumps. The funds raised in the IPO allowed Skydive to expand through an acquisition of Australia Skydive, to offer 16 drop zones and expected to deliver an annualised 112,000 tandem jumps in the 2016 financial year.

Australia Skydive had 47,492 tandem jumps in the 2014 financial year – so the acquisition virtually doubles the size of Skydive the Beach business.

Revenues should also increase dramatically from $18 million in the 2014 financial year to more than $26 million this financial year and an estimated $47.5 million in 2016.

According to the prospectus, there is plenty of scope for Skydive to expand through further acquisitions as well as establishing its own 'greenfield' sites – although it will have roughly 54% of the market post-acquisition. Additional acquisitions may require ACCC approval.

As the company also notes, there are very low barriers to entry into the skydiving sector – only needing an aircraft, a pilot, parachutes, an instructor, one person on the ground, an Australian Parachuting Federation (APF) licence, somewhere to take off and land, and the ability to comply with relevant regulations.

That presents a problem for Skydive, as it means if the company generates high profit margins, which will immediately attract competition – with very low start-up costs – and force margins lower.

Unless Skydive can maintain some control over certain attractive locations and have a competitive advantage, then effectively tandem skydives become a commodity product – with price likely to be the key differentiator, much like airline seats. Skydive also has to compete with indoor skydive operators such as Indoor Skydive Australia Group Ltd (ASX: IDZ) – which can offer jumps that are cheaper, all weather and use less equipment.

As such, investors may be getting ahead of themselves. Skydive may do well initially and we wish it the best success, but Foolish investors should be looking for companies with more sustainable competitive advantages. I'm not sure Skydive the Beach is one of those companies. Additionally, at current share prices around 34 cents, the company is trading on a prospective P/E ratio of 25x for this financial year. That doesn't appear cheap.

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.

Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »