Surf's Pumping

Pie Funds

Pie Funds

First, a quick recap. Surfstitch managed to not only smash its prospectus forecasts in FY15, but it also beat its revised guidance. At its AGM in November, SRF advised the market that its revenue growth had accelerated to +40% YTD (up from 30% in FY15) and that margins had continued to improve. 
Revenue growth was impressive across the board, but of particular interest was the 50%+ revenue growth YTD in North America driven by SRF leveraging its global content strategy and 100%+ revenue growth in Asia. 

SRF followed up this trading update with the acquisitions of Garage Productions, a leading provider of action sports content and Surf Hardware International (SHI), the world’s leading designer and supplier of waterboard accessories. We think the market has not really come to fully appreciate the significance of the SHI acquisition. SHI is principally a content acquisition that also enhances SRF offering via niche vertical products. SHI supplies 9 of the top 10 rated male surfers and 8 of the top 10 female surfers, each who have thousands of loyal followers. SRF will be able to leverage these relationships in its core demographic to expand SRF’s offering. 

For those more interested in dollars and cents, SRF believes that the enhancement via niche vertical products will allow it to increase GP margins from 46% in FY15 to 50% - 55% in 2 – 3 years. This isn’t a change in strategy. First, SRF does not intend to make the mistake of extending its vertical integration into areas which could compete with the brands which it sells (e.g. apparel). The strategy will be limited to niche areas such as SHI products which dominate market share. Second, the model remains capital light, with SHI operating with negative working capital.

SRF also used the acquisition to formalise its goal of reaching $1bn in revenue in 5 years via organic growth. Given its leading position, large markets, accelerating growth and track record of execution, we believe that this is achievable. In the near term, SRF has guided to AUD$15m - $18m EBITDA for FY16 (ex acquisitions), skewed to the second half. We wouldn’t be surprised if SRF beat the top end of this range. In short, we’re riding this one to the beach.  


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