Small Caps | Apr 28 2015
-More synergies from consolidation expected
-Earnings upside likely from northern summer
-Margins could reach mid teens
By Eva Brocklehurst
Online sportswear merchant, Surfstitch ((SRF)), has upgraded prospectus earnings estimates for FY15 by 37% to $7.0m from $5.1m because of substantial synergies emanating from the consolidation of its European operations. Importantly, the company has removed its warehousing and office operations from France. Brokers greeted the news enthusiastically as it indicates the global strategy is progressing and Surfstitch should be able to extract further gains from its acquisitions as well.
JP Morgan believes there is more to come in terms of cost cutting and top line growth. The prospectus forecasts did not include one-off costs and there was some confusion as now the company has signalled there will be some redundancy costs, which JP Morgan estimates at $1.3m, pre-tax. Regardless, the broker raises FY15 earnings estimates by 12%.
In FY16 the full annualised effect of the consolidation synergies of $3.8m should be felt, much larger than expected. But there's more. Further opportunities are expected from the transition of the Billabong ((BBG)) websites and consolidation of front-end e-commerce platforms.
Site visits to the Australian website in the March quarter were up 63% and, if conversion rates remain stable, there is potential for a further $2m uplift to earnings on JP Morgan's calculations. May-June is an important trading period in the northern hemisphere and this is not yet factored into forecasts but the broker considers there remains plenty of upside potential. The company has already delivered beyond what was expected and JP Morgan retains an Overweight rating, raising the target to $2.06 from $1.95.
Bell Potter concurs, envisaging the benefit to FY16 of the global integration could be much greater as the company seeks to remove duplication around marketing, labour, IT and warehousing. An update is expected at the FY15 results in August which should also provide more detail on other initiatives such as the loyalty program, mobile applications and further dedicated regional sites such as Japan. The broker flags the fact that sales guidance is unchanged at $199.1m ahead of the key northern hemisphere summer trading period.
In the medium term, Bell Potter believes there is an opportunity for Surfstitch to reach mid-teen earnings margins through the implementation of integrated content and success with this strategy should instigate significant upside to base case forecasts. The broker's earnings upgrades and currency forecast updates lead to an increase in the target to $2.00 from $1.50. A Buy rating is retained.
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