Investors send Experience Co Ltd to the backpackers' bunks

Experience Co Ltd (ASX:EXP) shares could be cheap if management executes on its ambitions.

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This morning skydiving and adventure activity business Experience Co Ltd (ASX: EXP) reported a net profit of $6.8 million on revenue of $135.3 million for the financial year ending June 30, 2o18. The profit fell 28% on the prior year, with revenue up 51.1%.

Over the year the group will pay a dividend of 1 cent per share on 1.34 cents per share in earnings.

Experience Co. reported that on a "normalised" basis excluding "one off" expenses that include acquisition costs, impairments, and the adding back of amortisation intangibles profit came in at $14.5 million, which is up 29.5% on the prior year.

While this kind of reporting is not unusual and some of the costs are non cash, Experience Co. does have an acquisitive business model and as such investors should take the exclusion of cash acquisition costs with a pinch of salt.

The group also reported to investors that normalised cash provided by operating activities (backing out tax, finance, acquisition and other related costs) landed at $25.8 million, which is around 25% higher than the $20.6 million delivered last year. As such the year was reasonable when viewed through an adjusted lens.

Experience Co (formerly Skydive The Beach) now has a roughly even revenue split between sky diving sales and other adventure experiences that include Great Barrier Reef boat rides, helicopter rides, white water rides and other adventure tours.

The sky diving business performed below expectations as a result of a fatality at Mission Beach (not Experience Co operated) and what the group reported as poor weather patterns.

As a result domestic skydive customers were down a significant 23% annually, with international down 4.4%.

Its New Zealand skydive business appeared to ride out a January 2018 fatality to deliver some growth in skydives. In total tandem skydives grew 7.1% over the six months to June 2018 as thrill seekers seemingly shrug off the risks.

The group's Reef Magic Cruises in Tropical Queensland grew revenue 2.5% to $16.6 million, with a "normalised" EBITDAI contribution of $3.6 million. However, in a result typical of a mixed year, the Big Cat reef cruising business saw revenue drop 13.8%. Surprisingly, the group partly blamed this on "substantial amounts of rainfall" in tropical Port Douglas.

Over the past year the group also completed acquisitions of Byron Bay and Hunter Valley ballooning companies, with $20 million raised for the helicopter tour acquisition.

Looking ahead, management forecast total capital expenditures of $16 million, with a normalised EBITDAI of $37 million to $41 million on revenue of $165 million to $175 million.

If achieved this would represent some decent growth and likely lead the share price to lift above the 44.5 cents level at 52-week lows today. In total Experience Co shares are down 35% over the past year.

Foolish takeaway

The group reportedly has a good quality management team and is leveraged to the strength of tourism in Australia and New Zealand, with particular regard to the backpacker crowd and self-promoting Instagram generation drawn to Far North Queensland. The stock may offer some good returns from here, but I'm keeping it on the watch list until I'm comfortable with management's ability to hit forecasts among other things.

Motley Fool contributor Tom Richardson has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of EXPERNCECO FPO. You can find Tom on Twitter @tommyr345 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 Scott Phillips.

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