Surfstich Group (SFR): Shaping the Surf industry

Investment view: BUY, PT up 2% to $2.65. We have updated our forecasts for both the acquisition and the $50m capital raising. The acquisition adds $3.2m to pro forma FY16 EBITDA. SRF intends to pro forma its results and therefore has increased its guidance by $3m-4m from $15m-$18m to $18m-$22m. The result is an increase in eps by ~12% in FY16, ~5% in FY17 and ~7% in FY18. The varying effect on earnings is due to both the acquisition having less effect in outer years due to the growth rates of the businesses and our expectation of a greater gross margin impact on FY18 as SRF grows its vertical brands. Given SRF has effectively bought $39m of pro forma revenue in FY16, we have lowered our EV/Sales multiple from 2.0x to 1.9x. The result of all of our changes is an increase in our Price Target to $2.65 (previously $2.60) SRF remains one of our key picks given its long-term growth outlook, strategy and current valuation. Full report attached.