Billabong International
Recommendation
Our worst fears for Billabong International have been realised. The company reported another profit downgrade today, blaming European woes and poor summer weather. Instead of the forecast ‘strong’ growth in earnings before interest, tax, depreciation and amortisation (EBITDA) in 2012, Billabong now expects first half EBITDA to fall by at least 20%.
We estimate Billabong will be lucky to produce a net profit of more than $40m (or earnings per share of 15.7 cents) in 2012. Dividends will almost certainly be cancelled this year.
In The Billabong wipeout of 21 Aug 11 (Sell – $3.75) we said that ‘the company’s financial position has become precarious’. In today’s announcement, Billabong admitted as much. The company had been counting on clearing excess inventory to reduce debt, but it is apparently having difficult doing so.
The company ominously flagged a ‘strategic capital structure review’. Billabong clearly needs an equity raising, but stated this is ‘not the preferred path’. This suggests the company may try to solicit a takeover or other white knight. Whatever the case, management change seems likely.
The stock has collapsed 40% since 21 Aug 11, reflecting the company’s perilous position. It’s not too late to SELL.