Morgan Stanley downgrades ASOS to 'underweight'
By Michele Maatouk
Date: Monday 20 Jan 2020
(Sharecast News) - Morgan Stanley downgraded shares of online fashion retailer ASOS to 'underweight' from 'equalweight' on Monday, cutting the price target to 2,000p from 2,100p as it argued that consensus medium-term forecasts are "still much too high".
It noted that consensus is currently expecting ASOS' earnings per share to increase by 160% over the next two years and said this was "very optimistic".
"FY 2018/19 was very challenging for ASOS, with the company delivering only half the EBITDA, and a quarter of the earnings, that consensus envisaged at the start of the year. The market, however, is predicting that margins recover rapidly and that by FY 2021/22 earnings will be at all-time highs," MS said.
The bank said many investors see 2018/29 as having been affected primarily by operational problems.
"We disagree. In our view ASOS's problems last year were entirely consistent with much longer-term trends, with its business model being challenged increasingly both by slowing growth in the online apparel market and by rising returns rates," it said.
As a result, MS expects that there will be only a very limited earnings recovery and that consensus earnings per share forecasts for 2021/22 are around 40% too high.
At 1330 GMT, the shares were down 4.2% at 3,057p.
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