25th Feb 2015 11:40
LONDON (Alliance News) - Shares in domestic appliances retailer AO World PLC plunged lower on Wednesday after the group issued a profit warning for its 2015 financial year owing to weaker-than-expected fourth quarter trading in its UK business.
Shares in AO World were trading down 29% in late morning trade Wednesday at 199.8 pence, having hit a low of 150.00 pence just after the open. The company is comfortably the worst performer in the FTSE 250.
The company said its revenue growth year-on-year remains strong, but said it now expects its results for the financial year to the end of March to be slightly below market expectations due to weaker-than-expected revenue and earnings growth in its UK business.
AO World said it has found achieving sales in the fourth quarter to be difficult and said this has hurt its adjusted earnings. It said some of the revenue growth seen in the second half of its 2014 financial year and going into the 2015 year was "due to extra publicity surrounding the company at that time" due to its February 2014 stock-market flotation. That attention has impacted its year-on-year growth rate, the company said.
Issuing its third quarter trading statement in January, the company said it had expected to meet market expectations for both its revenue and adjusted earnings in the UK, even taking account of the loss of a logistics contract, the cost impact of driver legislation changes, and the adverse impact of Black Friday, which rather than producing incremental sales for the company, condensed sales into a smaller time period.
AO World said it expects those combined factors to result in revenue for its UK business this year of GBP470 million to GBP475 million, with adjusted earnings before interest, taxation, depreciation and amortisation of around GBP16.5 million. It added it expects these factors to have a further impact on the company's financial performance in its 2016 financial year.
The company said it is confident in its fundamental business model and said trading in Germany is progressing well, adding it is continuing to assess further markets for expansion. It also said the introduction of an audio-visual sales category in the UK is developing well.
"AO has experienced tougher than expected trading conditions in the final quarter of the year, as compared to the fourth quarter in 2014. While we are disappointed that sales and profits are going to come in slightly below expectations, we remain committed to our market-leading, customer-focused business model," said AO World Chief Executive Officer John Roberts.
The profit warning comes after broker Panmure Gordon earlier this month said AO World was "grossly overvalued".
Panmure analyst Michael Stewart had said the broker understands, via a linear regression analysis, how the share price reached its current level, but argued AO World does not warrant the premium is trades on. "Investors should be receiving a higher unit of sales growth per unit of price than the prevailing market price implies," Stewart reckoned.
Panmure initiated AO World with a Sell rating and a 152 price target. At the time, its shares were trading at 306.44 pence.
But on Wednesday, Numis said that though the profit warning was "disappointing", it continues to see the long-term growth potential for the company both in the UK and internationally and retains a Buy recommendation with a 300 pence price target.
By Sam Unsted; [email protected]; @SamUAtAlliance
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