18th Aug 2022 11:17
(Alliance News) - AO World PLC shares were on the up on Thursday, as it hopes for a revival of its fortunes as a year of "realignment" progresses.
Investors will be hoping for a much-improved outturn for the electrical goods retailer. There is an argument that things could not get worse than they have been for AO.
Profit caution, tumbling consumer confidence, inflationary pressures, a Germany exit and credit cover worries at suppliers; the past few months have seen a litany of poor headlines for AO - once a FTSE 250 constituent.
With a market capitalisation of GBP273.4 million, firmly below the GBP449.0 million for XP Power Ltd, the FTSE 250 constituent with the weakest market cap, a return to the midcap index for AO seems a slightly distant prospect for now.
However, a 20% share price hike to 48.31 pence on Thursday morning, slightly repairing the damage of a 79% decline during the past 12 months, suggests the market has not lost all confidence in AO yet, despite the past few months of difficulty.
Results for the year to March 31 cemented what was a tricky year for AO.
Revenue fell 6.3% to GBP1.56 billion from GBP1.66 billion. AO swung to a pretax loss of GBP37.2 million from a GBP20.2 million profit. Adjusted earnings before interest, tax, depreciation and amortisation of GBP8.5 million was down sharply from GBP64.4 million the year before, which the firm blamed on increased staff costs as well as higher marketing and logistics expenses.
Results showed a clearly "disappointing" year, but were "consistent" with guidance, analysts at Jefferies said.
Revenue guidance for the new year is "muted", the investment bank added. AO expects revenue between GBP1 billion and GBP1.25 billion. Adjusted earnings before interest, tax, depreciation and amortisation are expected around GBP20 million to GBP30 million - which would be up significantly on the 2022 financial year.
Jefferies added: "Profit has become management's key metric, rather than growth. This is driving a full review of AO's routes to market - any that are not delivering (or cannot reach) a 5% contribution, are being pruned. Revisions to the customer proposition (eg delivery charges) that will drive greater profit, potentially at the expense of revenues, are being trialled. Profitable channels are being built-out, and management has identified meaningful cost savings. Given the aggressive shift in focus to profit over revenues, perhaps we should not be surprised that the mid-point of the new FY23 revenue guidance range is 12% below our prevailing estimate (GBP1.28 billion)."
Still, Jefferies is impressed and expects good things from AO going forward. It lifted its recommendation for the stock to 'buy' from 'hold'.
"We have long seen value in AO's model and proposition. We are now also encouraged by the strategic direction that is prioritising value creation over growth-at-all-costs," Jefferies said.
"We upgrade to buy, seeing a good opportunity to own a business with a strong customer proposition, substantial market share, bolstered balance sheet, and a freshly pivoted strategy."
Shore Capital Markets was less bullish, however, noting AO trades at a premium to peer Marks Electrical Group PLC, "which also boasts profitability".
"The premium relative to Marks in our view remains at risk for AO shareholders given the complexity of its business model and competitive nature of its industry," Shore said.
"AO's multi-satellite warehousing format leaves it more exposed to rising fuel and labour costs which it will struggle to offset in a market currently experiencing strong competitive activity in pricing. We prefer Marks, which sells more premium products, and operates out of one site, giving it better pricing power and cost control."
By Eric Cunha; [email protected]
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