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We are seeing more interest in the sector and there is an increasing sense of expectation with each print. However, the consumer remains resolutely cautious for now. Valuations still look attractive against conservative medium-term growth assumptions.
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FY25 results showed good progress towards its longer-term 5%+ adjusted PBT margin target (FY25 4.1%) – helped by an improved focus on unit economics, attractive repeat customer numbers (c.60% of orders), and new customer acquisition levels (650k+ in FY25). Mobile phones remains a drag on performance (£19.6m goodwill write-off). A broad FY26 adjusted PBT guidance range of £40m to £50m reflects the degree of consumer uncertainty short term, musicMagpie losses, and the material opex headwind from NLW and NI increases in April. A strategic decision on mobile phones is likely in FY26, given ongoing losses. AO is also trialling customer service outsourcing/offshoring in South Africa which, if successful in maintaining its high customer service reputation built over the years (Trustpilot 4.9*), should deliver future cost savings. Forecast changes mainly reflect incorporation of musicMagpie acquisition. We cut FY26E PBT by 2%/increase FY27E PBT by 1%. More positive medium-term dynamics with a material market share opportunity to go after, particularly in non-MDA categories. AO is well placed to benefit from any improvement in the macro backdrop from falling interest rates and improved consumer sentiment. There is also potentially a more positive electricals category tailwind coming, driven by the natural replacement cycle (typically 5-6 years) and more product innovation coming. Ongoing balance sheet degearing raises the question of potential future dividends or capital returns in the near future. Year-end IFRS 16 net debt was £35.9m (IAS net cash £23m). Management seems happy with the ecosystem it has built and is downplaying the prospect of future acquisitions. The focus is now on driving operational leverage through its existing platform.
AO World Plc
Post the FY results, we highlight what is new and the insights regarding AO’s Five Star Membership Scheme. We believe this is the key to unlock share of wallet and non-MDA sales over the medium term. Buy, TP 137p.
FY25 results in-line For the 52 weeks to end March, AO incl. musicMagpie has reported a 27% growth in FY25 adjusted PBT to £44m (FY24 £34.3m) This is in-line with management’s last guidance at the end of March for profits to be around the top end of its £39m to £44m guidance range. Group Revenues grew 9% (LFL +7%) with B2C revenues +12%. The company completed the acquisition of musicMagpie mid-December with the acquisition contributing a £1.7m loss, slightly higher than the negligible loss guided. The implementation of a third-party warehouse solution for small products in the year has improved unit economics. Net funds at the end of March were £23m (FY24 £32m), with the outflow reflecting c£25m for the acquisition of musicMagpie plc and £11m to purchase shares for Employee Benefit Trust. Outlook – FY26 PBT consensus within guidance range Despite the wider macroeconomic environment, management is guiding to adjusted Group PBT of £40m-£50m. This compares to consensus FY26 PBT of £46.4m (INVe PBT £48.5m ex musicMagpie). Management has already guided for B2C to grow revenues at a double-digit rate and for other revenues to be broadly flat. Forecasts/TP under review We place our forecasts/TP under review as we are yet to incorporate the musicMagpie acquisition from FY26E which is expected to be a couple of £million loss-making in its first year. AO World has significantly improved customer profitability since COVID and is starting to benefit from the repeat purchasing by the cohort of customers it recruited back then (repeat customers account for c60% of orders), as well as a more rational market backdrop and over 650k new customers in the year. The business is making good progress towards its medium-term ambition for an adj. PBT margin of 5% (FY25 LFL adjusted PBT margin 4.1%), double-digit revenue growth and EPS growing faster than revenue. The share price is down 2.5% YTD and up just 3% over the last 3 months. Valued on a CY26 consensus PE of 15.6x
AO World^ (AO., NR CNP at 101p) - FY25A Results - Margin momentum
AO’s FY25 results illustrate the power of its excellent customer service, rated 4.9/5 on Trustpilot. 12% growth in B2C Retail revenues and a focus on improved unit economics has led to LFL Adj. PBT rising 32% to £45m - and margin +80bps to 4.1%. As already announced, FY26E will bring significant cost headwinds and so Adj. PBT guidance is £40m-£50m (we are unchanged at £45m). However, the medium-term outlook for AO is encouraging given the revenue momentum and opportunity for further margin expansion. Trading on under 15x Cal 2026 PER and a 7.5% Cal 2026 FCF yield we believe AO is significantly underrated and we reiterate our 150p fair value, equivalent to a cal 2026 FCF yield of 5%.
AO continues to build momentum in market share, sales, and margins. Business as usual is enough to deliver shareholder value, but membership offers sight on 2x market share, 2.5x sales, and 5x profit. We reiterate Buy.
Business as usual is enough to deliver shareholder value, but membership offers sight on 2x market share, 2.5x sales, and 5x profit. Buy. Click below to watch our video.
Business as usual is enough to deliver shareholder value, but membership offers sight on 2x market share, 2.5x sales and 5x profit. Upgrade to Buy.
To access the podcast, click here: as usual, we are available for meetings on any stock or topic, large or small, and wish you a good Bank Holiday.
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Disposable incomes are rising, but consumers appear to remain cautious. Stock valuations are low, with the structural growth average only 11x CY25E, 11x for Core, and 20x for e-commerce. US tariffs might impede short-term forecast momentum, but we believe they provide medium-term opportunity, and at current valuations the sector is a bargain in our view.
It is another upgrade, completing three years of improved margins, profitability, and cash generation. B2C trading remains robust coming into FY26, with AO’s membership scheme quietly building momentum in the background, driving frequency and share of wallet. We reiterate Hold, TP 115p.
AO has ended FY25E on a high with Adj. PBT rising c.30% (c.9% above consensus expectations), driven by its continuing commitment to excellent customer service. We anticipate AO’s investments in its proposition, Five Star membership club, market-leading delivery offer and recycling facilities will lead to significant profit and cashflow potential which we think is materially under-valued. Despite the macro cost-headwinds in FY26E, we forecast a 20% CAGR in Adj. PBT FY25E-FY28E which we think is undervalued, trading on under 14x cal 2026 PER. We raise our Fair Value from 140p to 150p, equating to a cal 2026 FCF yield of 5%.
Listen to the team talk through their takeaways from the US marketing trip by clicking the image below.
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Listen to the team talk through the second week of trading updates, as we look forward to the final tranche over the next fortnight. Click below to listen to our podcast.
Listen to our team talk through the first batch of trading updates, the harsh share price reactions to some of the statements, and a preview of what’s to come. To listen to the podcast, please click on the image below.
Christmas is upon us, but there’s not much cheer in the share price charts, with several stocks trading on single-digit PEs, effectively priced to fail. We believe this creates some trading upside for the January updates and decent headway over 2025.
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We discuss sector themes in the video. We visited a new Dunelm# store, and have had ‘deep and meaningfuls’ with AO World and ASOS. In terms of incoming calls, we have been talking most about B&M European Value Retail. There is still a long way to go ‘til peak is through, but we see Santa’s stocking as half-full.
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AO’s pivot to profit is largely done, although we are still seeing the impact, particularly in mobile, driving group margins higher as the group hones in on the profitable core to base future growth on. Major domestic appliance (MDA) share is rising, although non-MDA is key to future growth ambitions. We raise our TP from 100p to 115p and reiterate Hold.
Strong 1H results AO World reported a 30% increase in 1H adjusted PBT to £17m. Total revenues were up 6% with B2C Retail business up 13%. Good gross margin progression, up 90bps to 24.4%, with efficiency savings more than offsetting inflation pressures and lower basket value in retail from lower market prices. Sales mix was not quite as expected, with the wetter weather resulting in fewer fridges and air conditioning units being sold over the summer. Good progress was seen beyond its core MDA and management continue to tightly manage the cost base. Its third party warehouse solution for small products went live in April, which should help improve unit economics and enable AO to offer a wider range. FY25 guidance range raised Management has raised FY25 adj. PBT guidance range to £39m to £44m, compared to its previous range of £36m to £41m (company-compiled consensus: £38.8m; INVe £43.2m). Group revenue is expected to be £1.09bn to £1.13bn with growth of over 10% in B2C Retail. The business is making good progress on its medium-term ambition for an adj. PBT margin of 5%, double-digit revenue growth and EPS growing faster than revenue. The Budget is expected to result in an additional £4m of direct costs from April, with the cost at c£8m if indirect costs are included. Forecast/TP put under review Our forecasts are yet to be updated for FY24 results, but our FY25E PBT forecast of £43.2m is within management’s new guidance range. Post period end, AO has agreed to acquire Music Magpie plc. The Court hearing for sanctioning the deal is scheduled for 10 December.
We cut PBT forecasts for six stocks: boohoo, Halfords#, Pets at Home, Pro Cook#, THG, and Topps Tiles#. We also lower our target price for Halfords from 235p to 200p. We maintain our recommendations for all of the stocks.
Disposable incomes are on the rise, but consumers remain cautious despite the weather-driven boost in activity. Stock valuations have improved, although the Structural Growth average is still only 14x FY25E, 15x for Core, and 24x for E-commerce. Overall, the consumer appears to us to be in a much healthier place, continuing the positive momentum from our August sector update.
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Consumers are experiencing a rise in disposable income but spending cautiously, favouring non-retail sectors such as Restaurants (+7% YoY), leisure (+7%), and travel (+5%) over June. Savings and mortgage overpayments remain strong, reflecting a more conservative mindset. Stock valuations have slightly improved although the Structural Growth average is still only 12x FY25E, 14x for Core and 26x for E-commerce.
Trading on c.23x FY25 PE, we reiterate our Hold recommendation and 100p TP. Current trading is likely to benefit from strong TV demand ahead of the ‘summer of sport’.
Finals – 12 months ending 31st March 2024 Pre-reported full year sales are £1,040m, c. -9% YoY having been c. -12% at H1, which implies H2 sales were -6%, with positive sales reported in Q4 (at the full year trading update in March). Full year adj. PBT is £34.3m, +186% YoY and a touch ahead of prior guidance (Visible Alpha consensus: £33.5m). As such, H2 adj. PBT was £21.2m, +5.4%, YoY, driven by improving H2 sales declines and H2 gross margins up c. +100bps (H1: +400bps) - as management continued to implement its ‘Strategic pivot’. Operationally, good progress has been made; MDA market share declines also appear to have stabilised (following the ‘Strategic pivot’) and were -70bps for the year (H1 FY24: -160bp). As such, market share (in MDA) is now broadly back in line with its pre-pandemic average, at c. 15.1%, and pleasingly the company has also now achieved its highest Trustpilot rating at 4.8. New customers this year were reported at 600k (H1: +290k) implying H2 trends in line with H1 but, pleasingly, the repeat customer rate is now as high as 54%. Separately, the company reports that it has strengthened its position in the mobile market with the acquisition of intellectual property rights in and to the websites www.affordablemobiles.co.uk and www.buymobiles.net , giving it additional sale channels from which to grow the mobile business. Elsewhere, as expected, net funds were £34.4m (LY: £3.6m) – bringing overall liquidity to £116m (LY: £89m). Outlook and view Outlook: Management is confident of delivering “double-digit” revenue growth in FY25 (versus Visible Alpha consensus expecting +7% YoY, thereby suggesting current trading is strong) alongside adj. PBT of £36m to £41m (Visible Alpha consensus: £38.3m). Management also maintains its medium-term ambition for an adj. PBT margin of 5%, double digit revenue growth and EPS growing faster than revenue. We believe our top-of-the-range forecasts are underpinned by strong top line momentum in current trading. We recently initiated with a Buy and target price of 130p (see link to initiation: On the cusp...(39 pages) ). We reiterate our view that having significantly improved customer profitability since Covid, AO is likely to benefit from the surge in new customers won during the pandemic who are on the cusp of returning, to AO, in a UK electricals market that is more ‘rational’ and ripe for recovery. We believe today’s results - which show high customer repeat rates coupled with a confident outlook - supports our thesis. Meanwhile, further plans to reconfigure its supply chain could unlock profitable growth in the large SDA market.
AO has completed its turnaround back into profitable growth and announced FY24 Adjusted PBT of £34.3m, nearly triple FY23. This was 2%-3% ahead of our, and consensus, forecasts and equates to a 3.3% Adj. PBT margin. Having gained over 600k new customers in FY24, and with an improved mobile offer, management is confidently guiding to at least 10% revenue growth in FY25E. This is an upgrade for consensus revenue growth of c.+8% (ED +13%), though company guidance for £36m-£41m Adj. PBT is in-line with consensus (ED FY25E £38.7m). We recently initiated on AO detailing why its excellent customer service and AO Five Star membership club offer can drive repeat customer purchases and revenues, leading to improved profit margins. AO has confirmed again its 5% medium-term Adj. PBT margin ambition and though we conservatively forecast 3.9% in FY26E, our blue-sky scenario analysis shows the potential for AO to triple Adj. PBT to over £100m by FY27E. We reiterate our 140p Fair Value, equating to a cal 2025 FCF yield of 5%.
AO is the UK's leading online retailer of major domestic appliances such as washing machines and fridges and over the past 20 years it has built an excellent reputation for brilliant service. AO will report FY results on 26 June and has successfully completed its "Pivot to profit strategy". AO has exited FY24E with good momentum and we anticipate AO’s excellent customer service and AO Five Star membership club offer will accelerate repeat customer purchases across a broad range of electricals. This underpins our forecast revenue CAGR of 13% FY24E-FY27E and our Adj. PBT CAGR of 26% FY24E-FY27E. As a capital-light online retailer, we predict over 80% of Adj. PBT converts to free cashflow (“FCF”) resulting in over £130m FCF FY25E-FY27E. We initiate coverage with a Fair Value of 140p based on a 5% cal 2025 FCF yield, equivalent to c.11x cal 2025 EV/EBITDA and c.22x cal 2025 PER, under 1x our EPS CAGR FY24E-FY26E.
The sector is currently valuing trough earnings on trough multiples. Our top picks include a mix of strongly performing structural growth stocks, market leaders with recovery potential and key recovery picks.
AO WORLD^ (AO., Buy (from Hold) at 105p) - Reappraising the investment case
Meeting Notes - Apr 03 2024 (Amended)
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AO World's pre-close trading update saw an upgrade to FY24 guidance in response to good trading momentum with the core AO.com business returning to revenue growth during Q4. FY24 PBT is now expected to be at least at the top of the previously guided range of £28-33m, and we lift our forecasts to £3
Decent performance, but a Hold – Despite the beat and upgrades this morning from AO, we still struggle to see how the 10-20% revenue targets will be achievable. Recovery looks to be broadly markets driven, and at a c.20x PE, we see more value elsewhere in the sector. We maintain our 100p TP and Hold rating.
AO World^ (AO., Hold at 90p) - FY24F PBT guidance upgraded
AO World^ (AO., Hold at 87p) - Acquisition of A1 Comms Limited IP
For a discussion on the sector, or on any of the individual stocks, please do not hesitate to get in touch.
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Consumer spending power to increase over 2024 – Cornwall energy cap forecasts suggest that by autumn, the average household’s energy bills will have dropped by 40% since 2022, with an 8% QoQ drop in forecasts between 2Q and 3Q in 2024. Real incomes are set to be boosted further by absolute wage increases, NIC cuts, falling inflation and easing mortgage rates (currently a sub 4% five-year fix). The Asda Income Tracker shows the highest growth rate for two years, with Consumer Confidence also building, combining to paint a more positive picture for the next 12-18 months. Retailers still under pressure – Current trading conditions remain challenging at what we see as the likely nadir of consumer activity. Rates, wages and FX remain clear headwinds and we may see some short-term disruption from the Red Sea as freight is re-routed. Spring trading is unlikely to rebound quickly, but improving confidence and spending power give a sense of recovery into autumn. Attractive valuations ahead of recovery – As we move past the earnings drag from last year’s corporation tax increase, we believe valuations are looking increasingly attractive across the sector, with structural growth stocks trading on an average PE of 10x and consumer-sensitive recovery stocks like DFS# and Halfords# on single-digit PEs.
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Sector valuations on the whole look very cheap, with our structural growth stocks averaging 11x PE (coming in below the average PE of our core stocks at 12x). For a discussion on the sector, or on any of the individual stocks, please do not hesitate to get in touch.
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For us, rightsizing was the word of 2023 in retail. Demand and consumer behaviour needed to settle to its new normal. Within this was changing spending patterns by channel, retail vs leisure and product category. That was always going to make 2023 an interesting year for retail, but throw in the di
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Share prices have had a good run into Christmas, but we still feel cautious on consumer expenditure over the period (see our recent note). For a discussion on the sector, or on any of the individual stocks, please do not hesitate to get in touch.
While we are moving into a second Christmas peak, which is unlikely to break any records, the macro clouds should start to move on over the next 12 months.
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Profit pivot complete, it is now about growth. There are some easy wins, but for the shares to kick on, management needs to deliver on growth and the confidence on where it is coming from. We reiterate Hold, TP 100p.
The ‘pivot to profit’ is still delivering, getting closer to equilibrium, with a new, higher-margin base (now targeting % PBT margins rather than EBITDA margins). Growth remains the challenge. We reiterate our Hold recommendation, TP 100p
AO World^ (AO., Sell at 83p) - Upgraded profit guidance but what about the customer?
AO have reported 1H PBT of £13m, reflecting a 5.8% aEBITDA margin. Revenues declined 12%, but GM expanded +400bps yoy (and +130bps vs 2H23), whilst costs fell 16%. Cash conversion was strong with net funds increasing £12m vs FY. Management have adjusted FY guidance to look for c.10% revenue decline
We remain buyers of Topps Tiles# and Victorian Plumbing, and see any share price weakness as an opportunity. For AO, the ‘pivot to profitability’ has been impressive, but we remain uncertain of the future growth drivers.
AO/ TPT VIC
Our newly included regression analysis highlights the most undervalued retailers such as M&S, Halfords# and JD Sports#, with JD currently below average in EV/sales, PE and EV/EBITDA despite exhibiting one of the highest sales CAGRs as well as an extremely strong ROCE performance. Sector share price performance has slowed in the past month, due more to individualised events such as the Rolex-Bucherer acquisition and reports of a slow down by US sport retailers as opposed to wider sector trends. Consensus forecasts continue to trend upwards.
Initial Equity Trading Comments - 12 September 2023
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AO World^ (AO., Sell at 95p) - AO H1 messaging could be weak
AO World Plc Marks Electrical Group Plc
July/August are the quieter months for retail reporting, but promising upgrades from two of the sector’s bellwethers (Dunelm# and M&S) helped rally consensus PBT forecasts, with share price momentum also following suit. Consensus forecast upgrades are concentrated across the ‘core’ stocks – furthering our belief that the sector as a whole remains undervalued. Inflationary headwinds are easing, with an in-line CPI print propelling share prices on the day, which remains a driver for 2H margin recovery, in our view. From a consumer standpoint, interest rate increases are nearing the peak, although we have yet to see the full effects flow through.
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The sector gained 5.3% over the month, as the end of the interest rate cycle appears to be in sight. Consensus forecasts continue to tick up, as inflationary headwinds drop away. Trading on an average PE of c.13x, the structural growth stocks look undervalued, in particular JD Sports Fashion#. Similarly, Dunelm’s# c.9% dividend yield and high FCF yield remain a value flag. On 8x EV/EBITDA, the e-commerce stocks carry a marginal premium over the rest of the sector, but as margins recover, mid single-digit FCF yields are likely to build and drive re-rating potential.
AO World^ (AO., Sell (from Hold) at 98p) - Momentum upstream softens further
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AO World^ (AO., Hold at 85p) - Q1 leaves work to do
AO is trading on c.21x PER, c.9x EV/EBITDA. The ability to stay the course, retain the focus on profitable growth and build cash balances should provide support to the share price and potentially fuel a buyback. We increase our target price from 70p to 100p and reiterate our Hold rating.
AO World^ (AO., Hold at 81p) - Cost rebased but further detail limited
AO have reported FY23 revenue and EBITDA in line with pre-close guidance. This reflects the continuing focus on profitable activities, with margin and cost initiatives contributing to a 2H EBIDTA margin in excess of 6%. That momentum provides an underpin to management’s guidance of achieving its 5%
AO World^ (AO., Hold (from Buy) at 91p) - Our bull case now priced in
AO World^ (AO., Buy at 70p) - Frasers partnership offers AO a vote of confidence
AO World (AO.) - Buy at 68p - Ironing out significant costs
Meeting Notes - Apr 14 2023
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AO has reported FY trading, guiding EBITDA to the top end of the previous range (c.£45m, c.10% ahead of consensus / Numis). Management have noted continued traction on cost and margin initiatives, against a backdrop that has proven more benign that anticipated. Revenues have been guided to £1.13bn,
AO World (AO) has issued an un-scheduled update raising FY3/23 profit guidance at EBITDA level from a range of £30-40m to a range of £37.5-45m (+18% at the range mid-point). This has resulted from a combination of previously announced cost containment programmes, margin enhancements and marketing efficiencies all being achieved ahead of initial company estimates. But we believe that the decision to increase delivery charges has been the largest factor. The company has been helped by relative strength in its core Major Domestic Appliances (MDA) market and a generally benign competition position in the UK. Running the business for profit in a difficult market is clearly a sensible proposition. But investors need to wait for further indications on business strategy outside this stabilization phase before making any big calls at AO in our view. Revised PBT forecasts are effectively showing a 3%ish EBIT margin in FY3/25 with a low-growth sales base. Without the benefit of growth why would one own a 3% margin business?
AO has quickly flipped to focus on driving profitable sales growth, rather than growth at all costs. EBITDA margins are heading towards 6% in FY24, creating a cash-generative base. The question then becomes one of growth and how AO can drive share in non-MDA categories. Hold.
In an unscheduled update, AO has again meaningfully raised its adj EBITDA guidance following sustained improvements in margins. Steps taken to simplify the business and become more efficient have outperformed expectations while margin improvement initiatives have come with a continued resilient und
How quickly things can change. The sector has rallied over 40% from recent lows, outperforming the market by over 20%, despite earnings being broadly stable. But this looks justified. Fears were unfounded and the backdrop has improved. In updating our household cashflow, we note a better outturn to
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Following today’s unscheduled update this brief note is to update estimates in line with the revised guidance. The sales figure itself was behind our estimate at -17.2% YTD, despite a materially weaker 2H comparative. The upgrade to FY3/23 EBITDA estimates is assumed to relate to cost reductions although we expect changes in delivery charging (increased) will have played a part. There is very low visibility here and we regard the EBITDA upgrade as of little significance. AO is in the early stages of implementing its latest strategy of trying to be a bit more sensible and not betting the ranch. One consequence of this is right sizing its existing operation which had been set for a more expansionist strategy. The ability to recover these costs is not indicative of the business’ long-term capabilities, more of an adjustment. Looking to FY3/25 when the business should have the right cost base in place how should we value the £40-50m of PBT (if our new forecasts prove to be too pessimistic)? That depends in our view on the perception of sales potential in the business, which is clearly difficult to judge in the current environment. We remain Holders and the increase in our target price is an arithmetic function of the base assumptions in our DCF. Today should arguably give some reassurance but to a limited extent in our view.
Management remains focused on delivering 5%+ EBITDA margins in FY24, trading on 8x EV/EBITDA at that level in our forecasts. The challenge now is to demonstrate share gains into non-MDA categories.
In an unscheduled update AO have reported 3Q revenues -17%, in line with expectations, with further progress on margin supporting an upgraded profit outlook. The stronger margin looks to reflect the impact of cost and gross margin action taken over the course of 1H, which has yielded greater result
Retail is for life, not just Christmas: peak trading previews Steady outturn into 2023 – In the context of downgraded forecasts and flat growth expectations, Christmas trading is the subdued gateway into 2023, with consumers expected to rein-in spending further over 1Q. Don’t look for upgrades – We are not expecting many upgrades; for the few that are delivering outperformance, we do not expect this to feed into future year expectations yet either. Time to start backing the winners – The outlook for consumers next year is more challenging, a point now well factored into expectations. With many stocks at multi-year valuation lows, we expect the sector to start outperforming the economic backdrop, even before the last downgrade is in. The sector trades on 11x FY24E PE. Structural winners are on track to deliver a FY19-24E sales CAGR of c.16% (more than 2x), which is matched by profit growth. John.Stevenson@peelhunt.com, Jonathan.Pritchard@peelhunt.com, Ruben.Pathmanathan@peelhunt.com 4-page note
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Will there be growth? – AO’s focus on cash generation is driving a sharp turnaround in profitability and cash generation, certainly at a faster pace than we had anticipated. The key challenge is now on growth; how does AO drive non-MDA share without sharp pricing and high-cost marketing? Hold to see.
Following the closure of its German operations AO has reverted to making some money rather than chasing sales. This was already known and evidence of success is at an early stage. The company is guiding to underlying EBITDA levels consistent with breakeven PBT this year and modest profitability in FY3/24. We are not sure that it is out of the woods on financing and as such we retain a Hold rating despite today’s numbers upgrade.
AO have reported 1H U.K. revenue -17% yoy and aEBITDA of £8.8m (Numis -20% and £7m). Gross margins were broadly stable, with strong progress on right sizing the U.K. cost base, which fell £17m (or 15%) yoy. Management have retained revenue guidance but lifted EBITDA guidance to around the top of th
The sector now trades on FY24E PE of 11x. Structural winners are on track to deliver a FY19-24E sales CAGR of c.16% (more than 2x), which is matched by profit growth. 21-page note
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Electricals was one of the first categories to observe a slower demand environment post-COVID. Managment have been quick to act, within 12 months pivoting away from Europe and re-focussing on the UK opportunity. That focus is likely to fall on cost reductions, gross margin opportunities and cash ge
This is a pilot of what will hopefully become a series of five-minute videos that follow the style of the popular Just a Minute show (with some inspiration from Fighting Talk and Pardon the Interruption in the States: let us know if you like (or don't like) the format. This week: Energy prices The week gone by Online retailers The week ahead FX and its possible impact To watch the first episode of Just a Minute, please click the image below
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Given the updates on trade and medium-term targets arising out of the new UK-centric strategy already delivered to investors, the only vaguely new commentary was guidance for the current year. This had a very wide revenue range of £1-1.25bn and an unfeasibly narrow EBITDA range of £20-30m being the UK EBITDA (vs £22.5m FY3/22A). The fact that 20 weeks into a 52-week year with orders presumably very largely placed for calendar 2022 peak-selling season the company cannot indicate within a £250m range for the remaining 32 weeks highlights the fundamental short-term issue here. Clearly a £1bn sales out-turn is likely to result in a profit result well below the indicated range. The other issue remains whether the balance sheet is strong enough and where the touchpoint for a further refinance is. While trade payable days look reasonable on our estimates at around 45 at FY3/23, inventory needs to rebuild in our view and trade payables were actually over £200m at 3/22 (boosted by Germany to a degree). So working capital and credit insurance still have the capacity to undermine AO in the near term in our view. There is an equity story here which we will revisit after the forthcoming peak season provides better visibility. We have neutralised our target price for now.
AO reported FY22 results in line with guidance, with EBITDA of £8.5m and y/e financial net debt of £33m. There are few surprises within the shape of the results. Current trading is noted to be in line with the Boards expectations, which have been quantified as revenue of £1-1.25bn (FY22 UK £1.37bn,
Analysts - Tony Shiret +44 (0)207 886 2959 & Georgia Pettman +44 (0)20 7886 2721 Following recent newsflow – AO German closure/refi and Currys FY4/23 guidance – we publish our up-to-dates on these and Marks Electrical. Obviously, there is significant forecasting uncertainty for this sub-sector of retail from pressure on discretionary demand likely at the key trading time this year – Black Friday and Christmas. So the adjustments here may not be our last. This could be most impactful at AO World (AO) where the recent refi looks light in our view. Currys (CURY) appears to be using the near-term uncertainties to reduce expectation for margin achievement on a longer-term basis. Marks Electrical (MRK) seems to be outperforming the market very significantly but getting dragged in the near term by that market. We have reduced our recommendation on AO to Hold given the continuing financing uncertainty in the near term but retain our positive rating on MRK and negative rating on CURY. The speed with which AO’s cash resources dissipated was both surprising and not in our view fully addressed by the recent £40m fundraise. In theory credit insurance worries and the rapid deterioration of AO’s working capital could be seen as a one-time adjustment which should now have been addressed by the re-basing of its supplier terms. But weakening demand should have suggested further caution and a larger fundraise in our view. So we do not believe that this matter is over necessarily. With a very concentrated shareholder base and institutional wariness of discretionary distribution stocks limiting new investment in the space generally, we would imagine that the way the fundraise turned out was determined by very few people and this may explain its relative paucity. Clearly it is not a ringing endorsement of management which may struggle to survive another fundraise this year. This is a shame because AO has been a genuine game-changer in a variety of ways and remains the gold-standard of service delivery (along with Marks Electrical) despite the incredibly tough market it operates in. We are not averse to a Bit of Boring after the volatility of the past couple of years and our revised forecasts only have EBITDA margins of 3% and sales growth of 6% in FY3/25 compared with the newly issued medium-term targets of 5% and 10% respectively for context. We will wait for Black Friday before we decide how to play this one. Currys Prelims included loose guidance for the current year of PBT in the range £130-150m reflecting some cost category annualisations, opex inflation and the continuing benefit of the reduction of the duplication from Carphone Warehouse in the cost base. The whole package was presented in the style of “We are in control but what do you really expect?”. We would, however, point to the decision to discontinue the much-heralded move to sell expensive mobiles with an accompanying credit offer. This means that the mobile business has now probably lost three quarters of its scale under the current management. It also does not augur well for the stated aim of encouraging sales growth elsewhere with a credit offer. Similarly the introduction of a Buy Now Pay Later offer looks mistimed to us. But the main problem facing the business is clearly the impending slowdown in demand for discretionary product into the 2022 peak selling season. Currys probably needs to be run very defensively for the foreseeable future given its operational gearing. Of equal concern are comments about the switch to online making the 4% EBIT margin target (under IFRS16) more difficult to achieve. This should logically result in further store closure in the UK which will not be good for financial delivery in the near/medium term. As with all retail restructurings this one will run and run. After the prospective current year battering Currys will probably have a one-off recovery. But there are no signs of a break-out strategy emerging in our view. We believe that during MRK’s 1Q FY3/23 the online MDA market has been down around 20% and online TVs down around a quarter. With this in mind we feel that our forecasts now need to be reduced as there has also been some discounting and continued pressure from marketing spend industry-wide. This said we are reducing our full year sales growth estimate from +20% to +14% in line with more recently published estimates. Clearly this implies a big increase in market share consistent with the underlying investment thesis here. There is a continuing level of uncertainty here relative to overall market conditions. But MRK is likely to report the best sales results in the UK electricals market by a wide margin this year, is less operationally geared and has a stronger balance sheet than its rivals and is not dependent on low quality earnings streams like warranties and finance attachments. All of these considerations point to it as the quality investment proposition in the space. Our DCFs are now pointing to a 120p target price with a 12% WACC. There will be an update at the 11th August AGM.
AO/ CURY MRK
A capital raise shores up AO’s balance sheet, and gives management room to re-focus on their core UK market. We see room for cost removal and operational improvements to enable a path towards historically achieved margins. There is no getting away from the reality of a painful retrenching, and exec
General Retailers - Trading Comments - AO AO WORLD^ (AO, CR CNP at 68p) – AO’s world of bother worsens further still
While it has been obvious since just after peak-COVID that AO has been struggling in Germany, the decision to pull out through closure highlighted how little end-value was generated over seven years. The immediate priority now switches to keeping the remaining UK business going but there is evidence of significant cash burn, suggesting deterioration in supplier terms. Drawing a line under German investment and losses was probably (unconfirmed) necessary to placate the Group’s lenders. Conceptually the selling side of the AO model remains attractive. But AO looks to be in a weakened state even before the looming consumer spending squeeze is upon us. We are not sellers despite the near-term fundamentals because it would not take a lot of capital to get AO through the next year or so in our view. The risk is a sweetheart take-private deal. A fundraise might appear dilutive initially but could unlock value by allowing AO to reset its strategy without immediate funding pressure.
German exit AO’s decision to exit the German market looked inevitable, although some had expected a sale rather than outright closure. The website is likely to cease trading within six-to-eight weeks, with the overall closure cash cost likely to be £10-15m. Closure of Germany brings an end to AO’s international ambitions, and the ongoing cash burn, but it also puts the focus on the core UK business and the opportunity to drive higher margins and profitability over time. We still expect AO to remain loss making through FY23 and into FY24 in lieu of any major shift in trading approach, although cash outflows should be stemmed by FY24. John.Stevenson@peelhunt.com, Jonathan.Pritchard@peelhunt.com, Ruben.Pathmanathan@peelhunt.com
AO have announced the conclusion of their review of the German business will lead to its closure. The closure is expected to incur cash costs between nil and £15m, with the latter being broadly equivalent to the losses we had expected this year. Management note an intention from here to focus on pr
4Q update, downgrades and CEO share sales Reflecting continued weakness in the UK market, AO’s 4Q sales momentum continued to weaken, while sales revenues in Germany fell more sharply as AO pulled back on marketing spending. FY revenue fell short of PHe by c.5%, with EBITDA guided to £8m vs our £10.7m forecast. We downgrade our FY23 EBITDA forecast to c.£13m as AO cuts back on costs added to service the Covid demand. We are still looking at ongoing FCF outflows, which need to be stemmed. Founder John Roberts has indicated an intention to sell shares on an annual basis. Shareholders may wish to follow. We reduce our TP to 70p. John.Stevenson@peelhunt.com, Jonathan.Pritchard@peelhunt.com
FY22 Trading update
Chart Book - RMI still sees a demographic tailwind Older demographics, particularly retirees, dominate RMI spending in the UK, accounting for c.35% of total spend. They overwhelmingly own their homes (often outright) and, post pandemic, sit both equity and cash rich. Covid-related savings have accrued to older, richer demographics with fewer fixed costs, while increased house prices have naturally benefited those with limited mortgage debt. This cohort remains ready and willing to spend on RMI in our view, which should support the market into the medium term. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, John.Stevenson@peelhunt.com, Jonathan.Pritchard@peelhunt.com, Charles.Hall@peelhunt.com, Andrew.Shepherd-Barron@peelhunt.com, Harry.Philips@peelhunt.com 36-page note
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Unfortunately AO appears to have decided to throw in the towel in Germany, with a strategic review announced and unlikely in our view to result in continuing in the German market. Coming a couple of years after the pull-out from the Netherlands, obviously it calls the scalability of the model into question. Modelling the UK business with a c10% sales growth rate and a 3% long-term EBIT margin gives us a DCF-based valuation (with an 11% WACC and 2% long-term growth rate) of 130p. While not an entirely unexpected turn of events after the Interims, this news is pretty negative relative to the model’s potential but clearly marginally positive for near-term delivery. The other big unknowns are how it is planned to run the UK business, whether AO needs refinancing and whether management would be able to take it private again. The inclination on a bad news day is to reduce the recommendation. But we can see value here and management will be under heightened pressure to perform.
COMPANIES DISCUSSED IN TODAY'S EMAIL Issuer Sponsored EAGLE EYE+ (EYE, House Stock 575p) – Flying high – positive trading update, another US win and a 3% upgrade EMMERSON PLC+ (EML, House Stock, 6p) – Balance of Basic Engineering package awarded to Reminex GREENCORE GROUP+ (GNC, House Stock, 125p) - Encouraging sales growth, cost recovery progress (more to do) – deep future value JOHN MENZIES+ (MNZS, BUY at 299p) – FY Trading update, Meeting Higher Expectations MISSION GROUP+ (TMG, House Stock, 55p) – Share price weakness overdone TRANSGLOBE ENERGY+ (TGL, 220p, House Stock) – FY22 capital budget and production guidance; near term plans to revisit dividend policy reiterated. FTSE 100 ST JAMES’S PLACE^ (STJ, Under Review at 1530p ) – Record levels of new business FTSE 250 AO WORLD^ (AO, Under review at 106.9p) – Q3 Trading update and Strategic Review of the German business IG Group^ (IGG, Buy at 822p) – Strong interims lapping tough comps, positive EPS momentum continues NCC GROUP^ (NCC, BUY at 216p) – Interim Results, FX hit, Inflationary Trends RANK GROUP^ (RNK, Buy at 149p) – Interim Results AIM KEYWORDS^ (KWS, Buy, 2466p) – Full-year trading update, marginal revenue upgrade MORTGAGE ADVICE BUREAU^ (MAB1, Hold at 1295p) – In-line full
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3Q in line with downgraded forecasts, Germany in review AO’s 3Q trading update is in line with November’s profit warning and guidance. 3Q UK revenues fell by 12% yoy, up 47% on a two-year basis as the market struggled to get over the Covid-comparatives, while German revenues were down 24% yoy. Critically, management has announced a strategic review of Germany, with preferred options likely to focus on revenue-generating initiatives rather than exit. The business needs to reverse ongoing FCF outflows, until this is resolved we think the shares are unlikely to garner support. John.Stevenson@peelhunt.com, Jonathan.Pritchard@peelhunt.com
AO have reported 3Q trading with Group revenues -14% (2yr +45%), at the lower end of the -5% to -13% range guided to for 2H. In the UK revenues declined -12%, with the 2yr +47% (vs 1H +65%), whilst in Germany ccy revenues declined -24%, with the 2Y +35% (vs 1H +89%). Management have left FY guidanc
Meeting Notes - Dec 16 2021
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AO is navigating a bumpy path to normalisation. Overall and channel demand is volatile whilst cost headwinds take time to be absorbed. Having leant into the COVID opportunity, AO is emerging with a better invested, but also larger, cost base which will require a higher throughput to leverage it. Me
Management plans remain to increase scale via product and geographic extension. There is clearly greater uncertainty about the pathway and the reversal of some of the COVID gains, rather than building on them, represents a loss of value in the long-term appraisal here, hence our target price reduction to 135p (-70%).
Interim results & profit warning, downgrade to Hold On a two-year view, AO’s progress has been monumental, with revenue up 67%. The Covid cohort is outperforming the average, with German customers repeating faster than the UK too. However, sales have slowed against tough comparatives, the driver for guidance and forecast downgrades. We cut FY22E EBITDA from £36.8m to £10.7m. AO has a strong platform, what we need now is more evidence of its ability to scale over the medium term while generating FCF. With our new estimates pointing to ongoing cash outflows, the shares are unlikely to give AO the benefit of the doubt. Hold, TP cut from 300p to 115p. John.Stevenson@peelhunt.com, Jonathan.Pritchard@peelhunt.com
AO profit warning; bumps in the road Back in July, management was confident of ‘comping the comps’ and delivering double-digit sales growth against last year’s c.60% revenue gains. This morning AO reported sales growth of 5% for 1H; it is a decent number given last year’s performance and was representative of where forecasts were originally, but unfortunately falls short of revised expectations. Growth of 3% in Germany will also raise questions on the European expansion. The medium-term opportunity remains significant and AO is generating cash, but the shares will take time to move forward again. We cut our TP to 300p and maintain our Buy rating. John.Stevenson@peelhunt.com, Jonathan.Pritchard@peelhunt.com
Most of the recent Prelims newsflow was imparted to the market in a vaguer form around the April pre-close update. Profits will be "broadly maintained" at the current level for the next few years as AO seeks to both increase its marketing spend and invest across a series of areas but principally enabling systems to allow more rapid scaling, enhanced recycling facilities and territory extension. The systems work will be put in place over the current year as a precursor to AO's next overseas expansion into three as yet unspecified new countries by 3/26. Start-up "investment" will impact delivered financials. AO's aim is to have a sales base over double the near-£1.7bn achieved in FY3/21 by that time. This has become a more testing model for investors to value as it has pulled back from "banking" the benefits of historic investment. In our view the now-firmer international plans support why we have always bought this company - scalability - and we see no reason to change this position. The reduction of near-term cashflows impacts our DCF and our target price is reduced by 22% to 450p.
Final results & investment downgrades As expected, AO’s ambitions for growth have stepped up, with management looking to drive incremental marketing spend and infrastructure investment. We had anticipated this leading to downside pressure on EBITDA for the year ahead, maybe to the tune of c.£10m to hold profits flat. In the event, we are now looking at FY22E EBITDA of £56.6m, down c.£20m from our previous estimates. AO is a business with scope to double revenue over the next 3-4 years, with wider expansion across Europe. Trading on 0.6x sales, c.20x EV/EBITDA, we remain Buyers, but reduce our TP from 450p to 375p. John.Stevenson@peelhunt.com, Jonathan.Pritchard@peelhunt.com
AO have reported FY EBITDA of £64m, modestly below NSe of £68m. With a larger and stronger base in the UK, proof of concept overseas and strengthened balance sheet, management are looking to invest to accelerate growth, with an ambition to double revenues within 5 years. In FY22 this will see £30m
Time to buy ahead of European expansion AO shares have lost momentum this year, dropping back as investors question the ability of European electricals markets to kick on again and as management intimates that it may be time to invest. We see a business with the potential to double revenues over the next 3-4 years, underpinned by strong, sustainable levels of FCF. Having now shown the right model to trade profitably in Germany, AO looks set to push forward into a number of new territories over the next 3-4 years. While this might come at the expense of short-term profit growth, the business is still showing momentum and trades on a discount to peers. Time to Buy. John.Stevenson@peelhunt.com, Jonathan.Pritchard@peelhunt.com 10-page note
Housing RMI planning permissions rise 17% in 4Q20 Planning permissions for household developments (extensions, loft conversions, etc) increased by 17% in 4Q20, with increases in every region of the UK. Historically, these have been an excellent lead indicator for RMI demand, with consumers using the heavy materials for construction and fit-out, followed by soft furnishings and appliances for the finishing touches. Clyde.Lewis@peelhunt.com, Sam.Cullen@peelhunt.com, Charles.Hall@peelhunt.com, John.Stevenson@peelhunt.com, Jonathan.Pritchard@peelhunt.com, Andrew.Shepherd-Barron@peelhunt.com 25-page note
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Strong end to FY21 AO’s FY21 revenues increased by 62% to £1.7bn, coming in ahead of our forecasts. Consumers’ online shift shows no sign of abating as we anniversary last year’s lockdown. This permanent market shift underpins on-going double-digit growth rates in the UK into the new financial year, with Germany now moving beyond break-even in FY22. We expect management to capitalise on the opportunity, with investment to drive the wider offer and plans to push into new European territories in due course. Trading on sub 1x revenue, 17x EV/EBITDA, none of this potential is in market forecasts. John.Stevenson@peelhunt.com, Jonathan.Pritchard@peelhunt.com
Back for Good Non-essential stores can reopen next Monday and we expect footfall and sales to be very strong. Yes, customers have changed their shopping habits, in some cases forever, but we think there is a lot of pent-up demand in many categories, and customers have cash to spend. Home improvement will remain to the fore, and it is a long time since many shopped fashion ranges with intent. Some valuations already discount a strong bounce in trade, but there are plenty of opportunities. Dunelm#, DFS#, AO, Halfords#, JD# and Lookers# are interesting reopening trades, but we see the sector basket as a whole as a Buy.. Jonathan.Pritchard@peelhunt.com, John.Stevenson@peelhunt.com 5-page note #Corporate client of Peel Hunt To watch the video of Jonathan and John discuss this note, please open the note and click on the image like the one below.
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A tax on all your houses While the business rates review has been put back to autumn, it seems likely that the current relief programme will be extended (note all our forecasts assume full business rates), which may well mean that rates never return to the same level for High Street retailers. We look at the case for an online sales tax and how it will impact the sector; there’s a logic for higher rates in warehousing, lower rates in retailing and an online sales tax with a corporation tax offset, which will likely shift the tax burden from the High Street to the less profitable pureplays. John.Stevenson@peelhunt.com, Jonathan.Pritchard@peelhunt.com 7-page note
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The strength of the global container market over the last six months has attracted attention beyond the shipping market. A combination of strong demand for consumer goods, port congestion, equipment shortages, extended supply lines and disruption to global manufacturing have all contributed. The container market experienced contrasting fortunes during 2020. H1 2020 volumes fell by 6% (yoy) at the onset of the pandemic. In H2, volumes recovered sharply with 5% expansion yoy, following a recovery in Chinese manufacturing and strong global consumer durable goods demand. This led to container spot rates reaching all-time highs in Q4 2020. In addition, limited new vessel supply also contributed to the market strength. Although, new ordering has picked up deliveries take time. The switch in consumer behaviour to durable goods back to other forms of discretionary spending (entertainment, leisure & travel) may reverse to a degree, but the overall demand pattern looks likely to remain. The key is the extent/nature/shape of any global economic recovery as the roll out of vaccines globally enables society/economies re-opens and this will show the strength of the container market through H1 2021. The picture may become clearer after the Chinese New Year. In this note, we look at the developments in the Container market, the impact upon general retailers/consumers as well as some recent sector company news.
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Global tech valuations remain high, as the ‘melt-up’ continues, driven by government policy and some apparent exuberance. In the UK, however, tech companies remain firmly in the ‘regular bucket’ from a valuation perspective (outlined on p.3). We therefore remain positive on UK tech from a macro perspective, and also see good alpha potential in individual stocks, such as RM# and Ten Lifestyle#. In this monthly we highlight eight key tech themes that we believe will be relevant for 2021. Damindu.Jayaweera@peelhunt.com, James.Lockyer@peelhunt.com, Oyvind.Bjerke@peelhunt.com 6-page note #Corporate client of Peel Hunt
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Q3 costs weigh on FY21E, but upgrades to outer years AO’s sales growth over Q3 has remained buoyant, outstripping our forecast expectations in both the UK and Germany. In profit terms, a combination of supernormal growth and Covid disruption means costs are also higher, driving a downgrade to our FY21E PBT expectations from £51m to £43.4m. However, AO is likely to end the year with >50% growth in active customers, and we upgrade our FY22E sales growth assumptions from 10% to a still conservative 15%, driving a PBT upgrade of £12m to £64m. Trading on 1x sales and 21x EV/EBITDA, AO is likely to continue to outperform over the next 2-3 years. Buy. John.Stevenson@peelhunt.com, Jonathan.Pritchard@peelhunt.com
AO has reported 3Q revenue growth of c.+68%, a c.15% pt increase on the 1H growth rate. In 3Q the UK grew +67% and Germany +77%, as additional capacity was brought in to service demand. These revenues came with modestly higher costs than expected, reflecting: (i) ongoing operational challenges of C
A warmer Christmas? Our early check on the retail temperature is positive as we “restart” again. The weeks pre-lockdown were pleasing, and essential retailers saw better than expected footfall through November. Black Friday, an extended campaign this year, will have protected some of the non-essential retailers’ sales. We were initially cautious about December: would nervous shoppers venture out into busy stores? We think they probably will (there’s not a huge amount else to do and shoppers have cash to spend), and whilst there were discounts at some stores, it didn’t feel anywhere near like panic. We are encouraged. Jonathan.Pritchard@peelhunt.com, John.Stevenson@peelhunt.com To watch Jonathan and John discuss this note, open the note and click on the image like the one below.
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Pure-play electrical retailer AO World updated the market yesterday with a full-year trading statement which highlighted sustained momentum, market share gains and a refinancing of its RCF. We upgraded the stock to our BUY roster at the beginning of May when the share price was 58p, highlighting recent positive competitor trading updates, with positive read-across for AO World. Since then the share price has rallied strongly, with investors looking again at the investment case. We believe that the current valuation looks more realistic on a forward one-year EV/EBITDA multiple of 29.5x and EV/Sales of 0.41x (based on a peer group of online retailers), ahead of the delayed full year results on 14 July. As a result, while making no change to forecasts at this stage, we downgrade to HOLD (from BUY), keeping the company on our positive watchlist.
Pure-play electrical retailer AO may well be one of the beneficiaries, in our view of the retail lockdown across the UK. Recent news from some of its competitors (Currys - part of Dixons Carphone and John Lewis department stores) over the last week or so, has suggested that online electrical product sales have surged in recent weeks. With store showrooms closed across the UK and consumers working from home for the foreseeable future, we think that AO will also have benefited from online demand for its products. In our view, the risk to revenue forecasts for FY2021 could well be on the upside. The share price has fallen 29% over the last three months and declined 15% over the last month. With the risk to revenue numbers potentially on the upside, we upgrade to BUY.
Investors have been choosing to take a more risk-averse position here until prospects for the UK consumer and AO’s German operation become clearer
After a year of difficult macro and weaker than initially expected performance AO responded by reorganising management behind founder John Roberts. Today the company is effectively reporting on what was delivered under its now-replaced strategy. News on current work is more general. But we would expect more meaningful analysis from the company and some news on how it expects to be set up over the next few years at the Interims in November.
Pureplay electrical retailer AO World (“AO”) has announced inline results for the 52 weeks ending 31st March 2019. Group revenues grew 13.3% to £902.5 million with adjusted EBITDA loss of £0.4m. Group operating losses fell slightly to £15.2m and adjusted loss per share was 3.78p. Net debt was £9.0m as a result of the Mobile Phones Direct (MPD) acquisition and the build out of the new recycling plant. UK revenues were £749m, up 10.1% year-on-year (yoy) including the contribution of Mobile Phones Direct (MPD) and up 5.7% yoy, excluding MPD. UK EBITDA rose 20.9% yoy to £27.4m and operating profits grew 28% to £14.9m. In Europe revenues grew 32.3% yoy at constant currency to €173m. European adjusted EBITDA losses increased to €31.3m reflecting less progress than expected on gross margins and operating cost pressures. As a result, operating losses in Europe widened to £30.1m, from £27.8m in FY2018. The European division remains at a cross roads and whilst revenues continue to grow, the business in Germany and Holland remains loss making and sub-scale. The ambition remains to be run-rate profitable in Europe during FY2021, but it remains to be seen if the company can achieve this in its desired timeframe.
Pureplay electrical retailer AO World (“AO”) is set to announce its preliminary results for the 12 months to the end of March 2019 on Tuesday 4th June. We last heard from the company at the start of April with their post-close trading update, which reassured the market that the outturn for FY2019 would be inline with market expectations. The results meeting will be the first since the return of founder John Roberts, as CEO. We look for John to outline his plan on how the company will accelerate its growth plans. In terms of valuation the company trades on a one-year (March 2020) EV/EBITDA multiple of 43.9x, which we think looks ahead of the investment case, in our view. We reiterate our SELL rating.
We have met returned CEO (founder) John Roberts. Our overall view is that he is motivated to re-energise the business over so long as it takes and to protect the value of his investment. He is clearly a top sales person so some context will be needed at the Prelims and probably more meaningfully the 2019/20 Interims in November. But overall we came away positive.
AO’s CMD highlighted the enthusiasm of the company anew and focused on the batch of new business areas under development. These included significantly a potential new Consumer Credit offer and more visibility on the already announced B2B division. On the more cautious side the current UK Major Domestic Appliances (MDA) market remains difficult in demand terms (down around 5% in 2Q as per GFK), albeit mitigated by a more benign pricing environment. The company’s upbeat view that recent flat-lining of online participation in the UK MDA market can return to growth is as yet un-supported by evidence. The new UK advertising campaign appears initially successful and Net promoter Scores (NPS) have moved up out of their (already good) post IPO range. We regard the group as well positioned and more investor focused than historically with a multitude of meaningful strategies and and products set around its core UK MDA proposition.
AO World (AO) is the leading online retailer of domestic appliances in the UK and additionally has a significant non-UK operation in Germany and the Netherlands. Our initiation today examines its scaling-upstrategies and its potential to re-rate. We conclude that scaling potential is already being demonstrated outside the UK where we believe the ultimate value lies while the UK needs to show how it can grow its core MDA sales to counter recent signs of maturity. We initiate with a buy recommendation and a 172p target price.
This update will probably be viewed with short term caution as UK sales growth has slowed in June and the benefit from the World Cup comes into question. Europe looks good to us and that is where the upside from future scalability will emanate to drive re-rating if that happens. Sales in 1Q were +8% in the UK and +46% ex currency in Europe. There may be a negative read-across into Dixons Carphone (DC LN, 182p, Hold, TP 185p).
AO World (AO.LN, 151p, NR) has reported in line with its post close update issued on 6th April (underlying EBITDA losses £3.4m against £4.2m loss at that time).There is no formal guidance for 2018/19 but the company notes a good start to trade with UK sales up double digits year to date (v +6.2% 1Q last year). Lots of moving parts in this one notably the progress of the European loss making business but the statement does not suggest any big change to expectation which currently indicates a move into overall positive EBITDA around £5m. The comments on current trade should reassure after Dixons update – albeit white goods were doing best in their product mix.
AO World has provided a trading update for the three months to 31st December 2016 which is below our, and the market’s, expectations. We remain bearish on this stock and we will eagerly await management’s commentary on the amendments to IFRS 15 this morning which could affect the way the company accounts for the revenues generated from product protection plans.
Whilst AO has reported UK revenue and earnings growth ahead of our estimates, the European business continues to fall short of our expectations. A substantial increase in service sales has massively benefitted revenue and margin and our analysis shows that falling bond yields have led to a greater contribution from product protection plans. Europe shows no signs of profitability and management have stated that the company will not reach breakeven in the territory until 2020. We reiterate our sell recommendation.
We continue to question the profitability of AO World's business model this morning, despite the marked acceleration in own website sales growth continuing through 3Q2016. We believe that the house broker's recent notes stave off a potential profit warning later in the year, that the downgrade cycle is yet to end and that the net cash position is becoming alarmingly tight. Our valuation analysis shows the stock to be worth 99p (from 114p), a significant discount to prevailing market price.
We explained on the 7th July in a note titled ‘Missing Estimates' that it should become apparent after today's trading update that the company will struggle to meet full-year market expectations. Although management stated this morning that they ‘expect the business model to deliver as expected for the full year', we have an increased level of conviction in our argument following the Q1 IMS.
It should become apparent on the 21st July when AO World (‘AO') reports its Q1 interim management statement that the company will struggle to meet full-year market expectations. With website traffic deteriorating on both sites, three consecutive quarters of tough comparatives ahead and a 4Q2015 exit rate of just 13.2%, downgrades to consensus sales and earnings estimates through FY2018 are most probable. We have downgraded our sales and earnings estimates for both territories ahead of the next trading update and have reduced our price target to 114p from 130p
It should become apparent on the 21st July when AO World (‘AO') reports its Q1 interim management statement that the company will struggle to meet full‐year market expectations. With website traffic deteriorating on both sites, three consecutive quarters of tough comparatives ahead and a 4Q2015 exit rate of just 13.2%, downgrades to consensus sales and earnings estimates through FY2018 are most probable. We have downgraded our sales and earnings estimates for both territories ahead of the next trading update and have reduced our price target to 114p from 130p.
