Questor share tip: Questor protects investors' capital

ASOS
£22.07-215p
Questor says SELL

ONLINE retailer ASOS issued its third profit warning within seven months sending shares more than 8pc lower yesterday. The shares are now worth less than half what they were at the start of the year and Questor still believes they could have further to fall.

ASOS said it now doesn’t expect a recovery in profits next year either and guided towards around £45m, well short of previous expectations of £62m. With the profits static at £45m and earnings per share flat at 40.2p, that leaves the shares at £22.14 looking terribly exposed on 60 times forecast earnings.

The problem is that growth is slowing sharply and it is difficult to warrant a share price of 60 times forecast earnings for a company where earnings are flat.

Group sales increased by 16pc in the three months ended August, down from 26pc growth in the previous quarter.

The real problem area is the economic slowdown in Australia. Nick Robertson, chief executive, said he is having to cut prices in Australia, one of his most profitable markets. The business contributes the “lion’s share” of sales from the rest of the world division.

This division reported a 5pc fall in sales for the three months to August, down from 14pc growth in the first half. The division contributes about a quarter of the group’s total sales and profits.

The UK remains the largest single division, contributing about 40pc of group revenue and a third of group gross profits. Here sales increased by 33pc but this performance is being dragged down by Australia and flat sales in the US. In Europe sales growth slowed to 21pc, from 44pc in the previous quarter.

The risk to investors could be total, with balance sheet net assets of £160m reported in the most recent annual results, or 191p per share, and largely made up of clothing stock.

Questor advised investors to take profits last September when the shares were £57 and we warned about rising costs and margin pressure when we said sell on January 14, with shares at £66.50.

Questor thinks the shares still do not represent good value. There is no firm clarity on where long-term after-tax profits will settle and ultimately this is all that matters for investors.

Long-term investors have certainly benefited from the fantastic growth at ASOS since it first raised £2.8m on Aim in 2001. The company has been a great success and shares have soared since then.

However, Questor retains its negative view at these prices and, given the outlook for retailers, the shares remain a sell.