Broker tips: AO World, Asos
By Iain Gilbert
Date: Wednesday 17 Apr 2024
(Sharecast News) - Analysts at Canaccord Genuity raised their target price on electrical retailer AO World from 52.0p to 75.0p on Wednesday after the group's trading update last week led the broker to adjust its FY24-26 estimates.
Canaccord Genuity said while the update provided a beat on consensus adjusted pre-tax profits, AO had still missed revenue expectations, with FY23 revenue set to decline 12%. Moving forward, the Canadian bank also believes AO's +10-20% top-line growth targets look "overly ambitious", while the margin recovery story has more or less played out.
Therefore, trading on an FY25E FCF yield of just 4.1%, Canaccord believes AO World to be "overvalued", leading it to retain its 'sell' recommendation for the stock.
"While the headline EBITDA multiple appears undemanding, post over £20m of lease charges associated with an inefficient hub and spoke model, in our view, FCF narrows to just £24m (conversion on EBITDA of just 35%), leaving AO trading on a cash FY25E PER of c.25x. Therefore, with easy wins made and questionable growth targets, we retain our 'sell' recommendation," said Canaccord.
Over at Berenberg, analysts lowed their target price on fast fashion retailer Asos from 510.0p to 490.0p on Wednesday as it lowered its gross margin assumptions to reflect the negative impact of discounting during the first half of the fiscal year.
Berenberg said Asos was making "significant progress" with its strategic endeavours, which were setting the business up for growth in Q4 FY24, with management tracking ahead of its full-year inventory reduction target and the business achieving "excellent results" in its Test & React model.
The German bank stated strategic progress was improving the operational agility of the organisation, which will culminate in "a higher level of profitability", in its view.
Berenberg, which has a 'buy' rating on the stock, said the key change to its earnings forecast was related to Asos' gross margin profile.
"We have lowered our FY24E gross margin assumption to reflect the negative impact from discounting in H124 and have assumed a circa 110 basis point year-on-year decline in H224E, as we continue to expect the discounting of aged stock to be a margin headwind. This reflects a downgrade versus our prior forecast which projected H224E to be equal to the margin recorded in the prior comparative period. We continue to forecast an adjusted EBITDA margin of circa 6% in FY25E as we expect the clearance of aged stock to deliver significantly improved margins," said Berenberg.
"ASOS trades on 0.3x 12-month forward EV/sales, c1 standard deviation below its five-year historical average."
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