- Trading updates spark share price falls
- Companies have benefited from the multiple lockdown effect
As of last Friday, online retailer AO World (AO) and cake maker Premier Foods (PFD) were the best performing stocks in the FTSE All-Share on a one-year basis, having risen 342 and 182 per cent, respectively.
But shares in both companies fell this week, after separate trading updates left investors wondering whether momentum might be about to stall. The price action also pointed to the market’s struggles to separate post-pandemic winners from losers once lockdown measures eventually end.
For AO World, headline figures for the three months to December provided more evidence of brisk trading activity in the Covid-19 era. A surge in orders to its website between Black Friday and the Christmas period resulted in a 67 per cent year-on-year rise in revenue in the UK to £457m and an even stronger showing in Germany, which was profitable throughout the period and where the top line climbed 77 per cent to €73.6m (£65.2m).
Despite this, the white goods retailer has incurred “significantly higher costs” in meeting requirements to build Covid-compliant operations. This has been particularly acute in managing customers’ product returns, also known as the reverse supply chain.
Cancellations of long-term mobile and warranties contracts have also increased, which management put down to pandemic-related impacts on customer behaviour.
Investors will be hoping that a digital-first preference for shopping for electricals will prove more resilient, and that recent investments to scale the business will help it keep hold of a newly-gained customer base. In the six months to September, warehouse space increased three-quarters to 1.3m sq ft, allowing weekly delivery capacity to more than double to 150,000. The company also says distribution points are now within 40 minutes of 90 per cent of the UK.
“I believe we've seen ten years of change in ten months,” said founder and chief executive John Roberts, who lauded decisions to scale up as the pandemic hit. “This not only set us up to satisfy customer demand for electricals for the current crisis but also for the longer term, as the structural shift to online becomes a permanent feature of the market.”
At 355p apiece, AO World shares now trade back above their 2014 listing price of 285p. That debut, which valued the then loss-making company at £1.2bn, or more than four times’ trailing sales, was initially seen as a sign of a frothy market by many in the City. The shares soon attracted the interest of short-sellers, and as recently as June 2019, more than 5 per cent of the stock was out on loan to funds betting on a price fall.
Those wagers have now disappeared, according to FCA data, suggesting investors believe sustained growth is still possible and that Mr Roberts’ prediction that “a majority” of new customers will never look back will be vindicated.
“Customer numbers are likely to be up 50 to 60 per cent,” said Peel Hunt retail analyst John Stevenson, prior to the trading update’s publication. “Even if some do not stay around, an element will be sticky, which will massively accelerate AO’s market positioning.” After disclosure of the additional costs, Mr Stevenson lowered his adjusted pre-tax profit forecast for the year to March from £51m to £43.4m, but lifted his expectations for FY2022 and FY2023 to £64m and £79m, respectively.
The brokerage also served up an upgrade for shares in Premier Foods, despite a subdued market reaction to the food manufacturer’s third quarter update. Citing buoyant sales and management expectations of a further reduction in leverage, Peel Hunt lifted its adjusted earnings expectations to 9.8p per share for the year to March, and 10p for FY2022.
Like AO, Premier has benefited from a large increase in market share over the past year, as the widespread closure of restaurants has pushed more people to cook at home. A 90 per cent increase in online sales in the 13 weeks to 26 December also suggests investments in marketing are paying off.
That management has been able to put cash back into the business is doubly encouraging, given the group’s previous struggles to service a debt pile that at one point exceeded the value of the group’s equity. Net borrowings are now expected to fall to less than two times adjusted cash profits by March, down from 2.9 times at the end of FY2020.
The Bisto gravy granule maker’s ability to reduce its gearing made it a beneficiary of the uncharitably-named ‘dash for trash’ trade in 2020. A lockdown-fuelled recovery means it is now on much firmer footing, but on 10 times forward earnings, investors remain understandably unconvinced that customers will prove as sticky as Premier’s products once they can again eat outside their homes.
We keep our neutral view of Premier Foods at 103p, but move AO to hold on its rapid gains in an unsentimental marketplace and what should now be viewed as its potential as an acquisition target.
Last IC View (AO): Sell, 164p, 14 Jul 2020
Last IC View (Premier): Hold, 98p, 10 Nov 2020