4th Jul 2022 11:24
(Alliance News) - Pressure continues to grow on AO World PLC, with fears at its suppliers adding to an already deadly cocktail of inflationary and margin worries faced by the electrical goods retailer.
Market sentiment towards the Main Market listing was already fragile, even before inflation ran wild, as traders were mindful of an unwinding of pandemic trends.
The stock has fallen 75% over the past 12 months. Shares were down 15% at 57.90 pence each in London on Monday morning.
In the latest poor headline, The Sunday Times reported that Atradius, a credit insurer, has cut its credit cover for the online retailer's suppliers.
Credit cover is crucial aspect of the retail supply chain. It provides cover for firms should customers not pay debts in time or at all.
Without cover, suppliers would usually require upfront payments to be made, the Sunday Times noted.
https://www.thetimes.co.uk/article/questions-over-ao-funds-after-insurer-reduces-cover-p0zrb5c8g
The result means the market may be asking serious questions of AO World's cashflow. Being asked to make upfront payments will hurt AO's cashflow.
Analysts at Shore Capital Markets noted AO World's finances have already suffered a blow of up to GBP15 million from wind up costs stemming from its Germany exit.
Shore analysts added: "The news for AO comes at a difficult time following the latest BRC data for May which firstly reflected a weaker real consumer budget naturally snubbing bigger ticket items, with household appliance spending having its worst month since 2014. And secondly, highlighting online pure-play's loss at brick and mortars gain, with in-store household appliance sales growing robustly as in-store availability was improving and shipping costs coming down allowing for more competitive pricing."
Analysts at Peel Hunt noted that AO World had liquidity of GBP50 million at the end of March, to go along with a GBP80 million revolving credit facility.
"Liquidity has since reduced due to normal trading activity. The group has commented that liquidity was expected to improve into 2Q, driven by management initiatives," Peel analysts added.
Still though, reductions insurance cover before a peak stock build period "could materially impact AO's operating model, where stock cover is normally only 3-4 weeks", the broker added.
Among the rest of the sector, there was little sign of AO peers suffering similar share price falls. Balance sheets are strong post-Covid, Peel explained.
Peel noted that SCS Group PLC for example now maintains chunky cash balances.
"ScS now famously carries significant cash balances having been effectively pushed into administration during the financial crisis after insurance cover was pulled," Peel said.
The Sunday Times report follows AO World's Germany exit plans.
The online retailer of white goods had kicked off a strategic review of the German operation back in January, as fortunes there weakened with pre-pandemic shopping trends re-emerging and the competitive landscape "intensifying". The German business also suffered from a "constrained supply chain".
The German operation contributes about 10% of AO World's revenue. The company expects to incur cash costs between "nil and GBP15 million" due to the closure.
Exiting Germany means AO World can now "increase its focus on its leading online position in the UK electricals market".
The closure of the German unit follows a difficult period for AO World. In late-April, shares were hit when the company warned about supply chain issues and a squeeze on consumer incomes.
By Eric Cunha; [email protected]
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