Skydive the Beach
Alex Milton, Principal and Co-Portfolio Manager
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NovaPort initiated a position in Skydive the Beach (SKB) at its IPO in March 2015.
Established in 1999, SKB has expanded from being the largest tandem skydiving group in Australia to a broader based, trans-Tasman tourism and leisure exposure with a focus on adventure activities.
Including the recently announced acquisition of Reef Magic Cruises, SKB is expected to generate annual revenue and EBITDA (earnings before interest, tax and depreciation/amortisation) of around $118m and $30m respectively by the end of 2018 financial year. These figures represent substantial growth on the $15.4m in revenue and $3.2m EBITDA posted in 2013. Commendably, this growth has been achieved whilst paying dividends and without taking on high levels of debt not withstanding debt financing for Reef Magic.
While still only relatively early days as a listed company, consistency in messaging and demonstrable confirmation of its outlined strategy through acquisitions gives us a high level of comfort regarding management including Anthony Boucaut (MD) and Anthony Ritter (CEO). We also note the former as founding managing director is a significant shareholder (~30%) in the expanded group.
Management quality and skills in execution as well as conservative balance sheets is a key criteria when selecting companies for the fund. Having said that the primary investment thesis for us (apart from valuation of course) is SKB’s growth profile.
The purpose of the listing was to facilitate an acquisition in the tandem skydiving sector which has since been followed up by expansion into New Zealand and then diversification into associated tourism and leisure segments which we believe underpins a buoyant long term growth profile.
Two key aspects of SKB’s acquisition strategy which underpin NovaPort’s investment:
- Earnings accretive
growth. A particularly positive aspect
of its acquisition strategy has been the earnings per share accretion generated
as the new companies join an ever expanding group. That is, it’s not about
sales growth at the expense of profits. Management have been commercially
focused on the bottom line impact as well as the price paid.
- Scale benefits and cross promotion opportunities: SKB competes with a large number of businesses big and small. However, its size and geographic reach affords SKB material scale efficiencies as well as the ability to offer a level and range of products which smaller, under-capitalised players would find difficult to match.
Acquisitions to grow presence in tandem skydiving as well as other associated segments:
- March 2015: Australian Skydive was acquired with funds raised at the IPO in early 2015. The acquisition more than doubled the number of tandem jumps operated by SKB to nearly 90,000 jumps and, just as importantly, opened the Queensland market to the group. Until then revenues were generated in New South Wales, Victoria and Western Australia.
- October 2015: Acquired Skydive Queenstown in New Zealand for $15.5m giving the group a 33% share of the national tandem skydiving market. Operating two brands, NZone Skydive and Skydive Paradise and employing over 70 staff, the acquisition added another 23,000 dives at the time of purchase.
- June 2016: Adding to its recently initiated New Zealand presence, acquired Skydive Wanaka (close to Queenstown) for $9.7m. Another high growth operator adding 17,000 skydives per annum to the group total.
- October 2016: First expansion beyond tandem skydiving with the acquisition of Raging Thunder Adventure Group for $15.5m. Specialising in adventure tourism in Far North Queensland, Raging Thunder offers customers activities such as ballooning, canyoning and white water rafting as well as tourism ferry and beach hire operations.
- April 2017: The most recent acquisition was Reef Magic Cruises for $15m. Reef Magic offers outer reef snorkel and dive activities across Cairns and Far North Queensland.
Risks to consider
There are a number of risks that we will monitor going forward regarding our investment in SKB including:
- Inbound tourism and currency. As a tourism and leisure exposure the volume of inbound tourists and the appeal of Australia as a holiday destination to both Australia and New Zealand can have an impact on volumes.
- Domestic consumer confidence. Given SKB’s products are essentially discretionary in nature we monitor consumer confidence, unemployment levels, retail figures as well as high levels of indebtedness for signs of any cyclical weakening in underlying demand.
- Weather. Especially the case for tandem skydivingwhere adverse conditions may see planes grounded for a period of time. In addition, Queensland’s susceptibility to cyclonic events is likely to have an impact potentially material in any given year.
- Reputation and safety. As a provider of adventure tourism activities which always carry risk, albeit minimised to the maximum extent possible with compliance and safety precautions, accidents can still occur.
- Growing pains following multiple acquisitions since listing. While reported results since listing evince scale and synergy benefits from expanded operations, it’s not uncommon for companies to miss expectations in the early stages of integration as issues arise that were not foreseen at the time of acquisition. In addition, underperformance can sometime show an acquired company is unlikely to meet management’s expectations over the longer term.