5th Jul 2023 11:10
(Alliance News) - Analysts focused on AO World PLC's swing to profit on Wednesday, and away from its fall in revenue, as its business streamline "so far" pays off.
Richard Hunter, head of Markets at interactive investor, commented: "Changing horses in midstream is no mean feat at the best of times, but AO World is showing signs that its decisive recent actions are beginning to take hold."
The Bolton, England-based electrical retailer said that revenue in the financial year ended March 31 slipped 17% to GBP1.14 billion, down from GBP1.37 billion a year earlier.
However, the company swung to a pretax profit of GBP7.6 million from a loss of GBP10.5 million.
Earnings before interest, tax, depreciation and amortisation increased by 90% to GBP40.9 million from GBP21.6 million, and the company swung to earnings of 1.13 pence per share following a 0.75p per share loss.
AO World did not declare any dividends for financial 2023, unchanged from the prior year.
The company attributed its improved performance to a "strategic pivot" in the first quarter to focus on profit and cash generation, which it said "fundamentally realigned" the business. This comprised a "rigorous and wide-reaching programme" to optimise its cost base and simplify operations.
Steps taken by AO World to this end included introducing delivery charges to offset growing costs in its logistics business, terminating initiatives such as operations in Germany and housebuilding activities, optimising its cost base such as by reducing its office footprint, and reducing its employee headcount.
"AO's decision to streamline its business has so far paid off, given the shift back to profit. It has closed operations in Germany, ended a trial with Tesco and ceased working with housebuilders, effectively saying it wasn't worth the time and effort. An internal rejig of teams and a simplified product range are some of the other initiatives undertaken to right-size AO into a more profitable entity," said AJ Bell's Mould.
"It's a good start, but the proof in the pudding will be sustained profit growth, and the market won't be able to judge its success until well into next year."
ii's Hunter added that he believes the company's decision to exit the German business was "difficult but necessary."
Looking ahead, AO World said it intends to focus on prudent investments in the business, taking advantage of market opportunities and leveraging "our growing and loyal customer base." The company expects to deliver an Ebitda margin of over 5% and return to "driving profitable, top line growth" this year.
Peel Hunt's John Stevenson, Jonathan Pritchard, and Ruben Pathmanathan said: "Interestingly, guidance is to switch from Ebitda to PBT, reflecting both IFRS 16 and the fact the AO now sees itself as a sustainably profitable enterprise. We anticipate limited changes to consensus, which is likely to remain at around GBP60 million of Ebitda and PBT of c. GBP30 million, although this implies some upgrades from lower end forecasts."
Jefferies said: "We continue to expect a return to growth by the end of FY24. With AO's profit potential proven, the next leg of the story should see the group look to return to top line growth while
maintaining its P&L discipline.
"While the goal of double-digit MT revenue growth remains, FY24 will clearly face headwinds until the strategic pivot to profit is annualised in August/September; we would anticipate meaningful revenue declines continuing through Q1 and into Q2 before for a sharp improvement in trend and a return to growth by the end of the year."
Jefferies also nudged its financial 2023 profit estimates up, expecting pretax profit to rise by 6% year-on-year.
Jefferies raised AO World's price target to 100p from 90p, it reiterated its 'buy' recommendation. Peel Hunt rates the company at 'hold', with a target price of 70p.
By Sophie Rose, Alliance News reporter
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