AO World falls to deeper loss

AO World’s (AO) shares have lost half of their value over the past 12 months, despite a 15 per cent uplift on results day. On the face of it, this mark-up might seem odd given the online electrical retailer reported a revenue collapse of almost a fifth and a big increase in pre-tax losses. 

The market’s reaction was down to the company’s outlook statement – it maintained full-year sales guidance, expects full-year profits to hit the top end of its forecasts, and placed next year’s guidance above consensus estimates. The bull argument is that the company has now shed the loss-making and poorly aligned parts of the business and in this sense the results, according to management, “represented solid progress in the plan to pivot the business to focus on profit and cash generation”.

There is certainly some truth to that. The company’s exit from the German market, after enduring torrid trading there, makes strategic sense as does (for example) its decision to turn away from the housebuilding sector. And action on costs, which is continuing, prevented a collapse in the gross margin which was down by 2 percentage points. But whether all of this is enough to warrant a material shift in the company’s prospects is another question – we still sit in the negative camp.

AO World pointed to its strategic shift and a decline in the wider electricals market as reasons behind the plunge in sales in the half. Revenue in its key product business, which consists of online sales from its website, marketplaces, and third-parties, collapsed by 20 per cent to £433mn as supply chain issues and the struggles of the major domestic appliances market had their impact. Services, commission, and recycling revenues also fell with the only top-line bright spot coming from a 32 per cent uplift in third-party logistics sales. This, overall, isn’t exactly encouraging. And with consumer demand floundering – GfK’s consumer confidence index sat at a negative 47 in October – the immediate retail future isn’t a rosy one, as management recognised when it highlighted the cost of living crisis in the results.

Numis analysts raised their target price from 70p to 80p and brought forward their forecast that the company can hit a 5 per cent cash profits margin to financial year 2025, a year behind management’s target. The house broker values AO World shares at 28 times its 2024 earnings forecast, which is a chunky rating. As things stand, we think a recommendation change is unjustified for a company which has struggled in the post-pandemic world. Sell.

Last IC View: Sell, 48p, 18 Aug 2022