A year ago (to the day) people were wondering whether the AO World PLC (LSE:AO.) success story was too good to be true.
Now we know. As if the share price retreat from around 400p to 124p last night was not a big enough clue, today’s profit warning, which has lopped another 17.1p (14%) off the share price has confirmed it.
READ AO World – back above 400p and back to being overvalued again?
AO World blamed the UK delivery driver shortage and supply chain issues and also noted some shoppers have gone back to their old bricks and mortar shops.
It’s not the company’s first warning. Back at the beginning of October, the white goods retailer grumbled about supply chain hitches while also bemoaning “challenging market dynamics” in both the UK and Germany.
For those who believe profit warnings come in threes. now might be a good time to exit (or short) the shares as those market dynamics and supply chain issues do not look like they are going to go away soon, which is a bit of a shame for the company as Christmas is just around the corner.
“With Black Friday just days away and in the run up to the crucial Christmas trading period and its busiest time of the year, the nationwide driver shortage and global supply chain issues have dealt a blow to the online retailer. It is anticipating less demand for its products than predicted only eight weeks ago, and now expects full year group revenue to be flat-to-minus 5% year-on-year. There is a large downgrade to management’s expectations with group adjusted EBITDA estimated to be in the range of GBP10mln – GBP20mln, compared to its previous forecast of GBP35mln – GBP50mln issued only last month when its share price took a significant hit,” observed Russell Pointon at research house, Edison.
“Its move into the German online market has also stuttered after significantly increased competition in the region, which may raise concerns given it suffered large losses after entering the Dutch market in 2016.
“Looking ahead, despite being a lockdown winner as people shopped from home in the pandemic, it is looking likely that shortages in certain product categories will affect the Christmas trading period, particularly for newer products where it has less scale, experience and leverage,” Pointon added.
Richard Hunter, the head of markets at interactive investor, said the company is currently in a parlous position. As opposed to being in a parlour position, which it would prefer.
“The company is anticipating poor availability in some categories for the second half as well, alongside ongoing supply issues, an increase in raw material prices and general inflationary pressures,” Hunter said, before throwing long-suffering AO World shareholders a bone.
“Amid the short-term noise, there are elements of optimism arising from a longer term view. Since pre-pandemic, overall revenues have risen by 67%, with growth in the UK and German operations of 65% and 82% respectively. The third party logistics business has seen revenues increase by 38.5%, including three new contracts in Germany, and the fact that AO World has now recruited more drivers to restore its levels could bode well for further expansion as other companies outsource their deliveries,” Hunter suggested.
“Despite these wild swings, the market consensus of the shares remains at a buy,” Hunter said but analysts are not always fast off the mark with changes to their forecasts, which accounts for why only three weeks ago, AO World was ostensibly the most undervalued stock in the FTSE 350, with a median target price of 322p among the six brokers that cover the stock.
Such has been the volatility of the stock it would be foolish to rule out the possibility of the share price hitting 322p within the time-frame envisaged by broker forecasts, namely 12 months, but it would be a brave investor that bet on it happening.
Broker Shore Capital, which has its more realistic 124p price target under review following today’s gloomy update, said the shares are at around one-third of the highs they hit last year and yet still trade on a price/earnings ratio (PER) of 35 based on projected earnings per share for 2022. That’s hardly Tesla levels of PER extravagance but some would say it is a bit on the high side for a glorified box shifter.
The current enterprise value of the business – essentially, the market capitalisation adjusted for debt and cash – is about twelve times next year’s projected underlying earnings (EBITDA), which Shore notes is more than double its listed peers.
That suggests that when Shore does decide on its new target price it might be in double rather than triple digits. Other brokers’ views are available, of course, but Shore is unlikely to be alone in losing faith in the company’s scope for accelerated growth given that the German market, supposedly the engine for the next phase of growth, is proving a tougher market to crack than AO expected. Plus, the UK retail scene is not exactly short of companies that tried and failed to export a successful format abroad; a few fashion floggers have arguably done it but beyond that it is difficult to think of a UK retailer that has cut the international mustard.
“The recent under performance in the country [Germany] leaves us with a fundamental question mark around the international play-book roll out and where we see the valuation in the future,” Shore admitted.