Surfstitch Group Ltd shares rocket on shock takeover plot

Surfstitch Group Ltd (ASX:SRF) shares are riding a wave of excitement this morning.

Tom Richardson

Tom is a holder of the CFA Society of the UK administered Investment Management Certificate (IMC) and has more than a decade's professional experience in the investment management industry in Australia and the UK. Tom now works as a writer and editor for TMF Australia and has two easy to remember rules of investing he likes to follow. Avoid overpaying for growth stocks and avoid paying at all for stocks that are cheap for a reason. Tom prefers growth investing over value investing and says it's not rocket science, just avoid overpaying for the best returns.

Published March 10, 2016 10:21 am AEDT

Online beach, surf and adventure wear business Surfstitch Group Ltd (ASX: SRF) shocked the market this morning after announcing that its own chief executive had resigned by email and is potentially involved in a Machiavellian-style plot to take over the company with the support of private equity backers.

The stock collapsed in value recently after the company posted softer-than-expected earnings results, although it is still growing at prodigious rates, with half-year revenue up 40% to $140 million and gross profit up 44% to $69.9 million.

Surfstitch generates more than half of its revenues overseas in Europe and North America thanks to the popularity of its youth market brands and as an online retailer enjoys bottom-line bulging profit margins in the region of 48%.

The company used to be part owned by fallen surfwear retailer Billabong International Ltd (ASX: BBG), although is now around the same size and has probably taken market share from its former backer.

For investors it is hard to read between the lines as to exactly what has gone on at the top of the company with the chief executive and co-founder having apparently been in cahoots with a private equity consortium in an attempt to take over the business.

This is unlikely to impress the board and remaining management members who may be inclined to tell the former chief executive where to go, unless he comes up with a monstrous offer too good to turn down.

The stock is likely to open higher this morning on expectations of a takeover bid being launched at a juicy premium, however, investors need to consider the likelihood of it succeeding given that the chief executive may have left the company on poor terms.

Private equity investors are also well known for their powers of persuasion and it is possible the CEO's ear has been bent in an attempt to seize control of a business that probably has many different growth strategies available. Betting on a take over offer succeeding looks a high-risk strategy, although the business does remain an exciting online growth story.

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