AO World still too rich

A recent strategy day for City analysts underwhelmed when it came to shedding light on how the group would progress from a sales-growth story to a profit-growth story. True, the group has appointed several senior managers with the specific expertise to help build business-to-business relationships, capitalise on rental and recycling trends and expand the company’s foray into insurance ‘aftercare’ policies as it phases out warranty work. There is also potentially scope to license the platform as well as for third-party logistics. And the company is using its impressive infrastructure to expand away from its traditional MDA market. However, analysts at Shore Capital said they saw “no clear roadmap” on how or when the company would turn these opportunities into “meaningful” revenue or earnings growth.

And while much of the focus remains on rolling out the brand across continental Europe, sales in the region only accounted for 16 per cent of the total last year, while trading in the core UK market looks tough. Growth in online penetration in the UK electrical market has been disappointing and is currently estimated to stand at 38 per cent, compared with 30 per cent when AO floated in 2014.

A drop in consumer confidence since the EU referendum has also led to falling MDA volumes, which has exacerbated tough competition in the sector. Indeed, when the company reported on its first quarter to the end of June, it blamed “a slower performance in June” across “core markets” for UK growth of 8 per cent for the quarter as a whole compared with previously reported double-digit growth in the first two months in the period. This still compared favourably with the 2.5 per cent growth in the previous year. Poor trading conditions and competition has also put pressure on AO to keep spending on marketing.

While AO’s European business remains diminutive in size, its growth is more impressive. First-quarter sales growth here came in at 46.2 per cent, compared with 57.6 per cent during the same period last year. As per the full-year results released in June, management has pulled back on promotional activity in Europe to try to improve overall returns.

A quick glance at the balance sheet tells us the group is well-funded with a useful net cash position. However the company has been getting through cash fast and the balance sheet benefited from a £50m share placing in April 2017 that increased shares in issue by 9 per cent. Last financial year saw £15.4m of cash sucked up by operating activities. Adding in capital expenditure, the group experienced free cash outflow of £20.6m for the year.