AO World is not the new ASOS or BOOHOO in household appliances

Wednesday, Dec 07 2016 by
5

The online household appliances retailer, AO World is a mediocre business, with a business similar to Dixon Carphone. Unlike Dixons, it has severely underperformed in the last eight years. Here are the summary of my findings:

A. In the last 8 years it made an aggregate net loss of £9m;

B. 33% of its gross proceeds went to various financial institutions, which is a high percentage to list in the LSE;

C. Their IPO prospectus promoted it as being a profitable entity with net income of £6m in 2013. Afterwards, AO world has made aggregate losses totalling £18m since then.  

D. AO World’s share price jumped by 40% to £4.15/share on the first day of trading, valuing it at £2bn. Now, it trades on £1.73/share.

E. It has impressive sales growth of 28% CAGR for 8 years which surprises me why the business can’t make a profit;

F. Before anyone speculates that AO World has an aggressive expansion, it spends a total of £28m since 2008. In 2016, AO World’s capex amounts to £6m, but sales are more than £500m!  

ASOS is capex heavy than AO World, but manage to turnover a profit. In 2011, ASOS’s sales were £339m, it made £10m in net profit and reinvest £25m in capital expenditure. The difference here lies in ASOS has its own clothing line, as well as selling famous brands.

A more detailed version is found HERE.

The release of its interim results saw some improvement in the company’s operations.

Sales increase of 23% is the norm. The “adjusted” EBITDA of £1.5m is a better performance than year £4.5m loss. Below is the rest of the assessment.  

 

Interpreting AO World’s interim results

 

Looking at the financials, the major key points from AO World are these:

1. AO World made a net profit of £200k, compared to a net loss of £6m last year. The net profit came from a gain of £4.3m due to changes in FX intra-group loans.

However, you should give credit to AO World in narrowing the operating loss to £2.8m from £8.9m.

 

2. The online retailer is still a cash burner.  AO World saw a decrease in net cash position from £29.6m to £21.3m, a year ago. The upside is securing revolving credit facilities of £30m in June for 5 years making share dilution unlikely, although it weakens its balance sheet.

 

3. Shareholders’ equity is down to £45.8m from £53m, but there has been an improvement in retained losses by £400k to £11.9m.

 

4. A possible sign of a turnaround is net cash profits (net operating cash flow) came in at £3.4m (last year it saw a net cash loss of £4.7m).

 

5. Net capex came to £6.6m, up from £3.4m.

 

So, is this progress from AO World? There have been improvements, but it is too early to tell if they are making genuine progress or these are down to accounting favouritism.

Investors need to remember AO World has a hefty market valuation of £730m. On top of that, it faces competition from Amazon, Dixons, Curry’s and Argos. Not to mention it has no USP.

Therefore, to justify the current valuation, AO World needs to make £50m in operating profit because it is to put the company on par with Dixon Carphone’s valuation.

 

Despite the adverse factors mentioned, I see the shares trading around the £1.50-£1.90/share range if global stock markets remain stable. However, we are eight years in this bull market and every year makes it likely a correction is on the horizon. I conclude that AO World will see its shares collapse if a minor recession is to hit Europe.


Disclaimer:  

By reading my articles and newsletters, you agree to use the research of Walbrockresearch.com at your risk. The purpose of this site is to educate and entertain readers. In no way, we are giving investment advice though the information provided is to my knowledge accurate at the time of the report. You should do your research, or seek advice from qualified professional investment advisors.

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AO World Plc is an online retailer of electrical products. The Company operates through two segments: online retailing of domestic appliances to customers in the UK, and online retailing of domestic appliances to customers in Europe (excluding the United Kingdom). The Company offers over 5,500 stock keeping units (SKUs) in the United Kingdom, approximately 2,000 in Germany and over 600 in the Netherlands. The Company offers a range of ancillary services, such as customer finance options, an unpack and recycle service, product care packs, and disposal and connection services. In the United Kingdom, the Company operates in approximately three categories: Major Domestic Appliances (MDA), Small Domestic Appliances (SDA) and Audio Visual (AV). The MDA market offers built-in appliances, such as dishwashers. The SDA market comprises small appliances, food preparation and floor care. The AV market includes television, audio, set-top boxes, digital versatile disc (DVD) and Blu-Ray players. more »

LSE Price
120p
Change
0.8%
Mkt Cap (£m)
550.5
P/E (fwd)
n/a
Yield (fwd)
n/a

Dixons Carphone plc (Dixons Carphone) is an electrical and telecommunications retailer and services company. The Company operates through four segments: UK & Ireland, Nordics, Southern Europe and Connected World Services (CWS). Dixons Carphone offers a range of electrical and mobile products, connectivity and expert after-sales services from the Geek Squad and KNOWHOW. Its primary brands include Carphone Warehouse, CurrysPCWorld and Simplifydigital in the United Kingdom and Ireland; Elkjop, ElkjopPhonehouse, Elgiganten, Elgiganten Phone House, Gigantti and Lefdal in the Nordic countries; Kotsovolos in Greece; Dixons Travel in a number of United Kingdom and Ireland airports, and Phone House in Spain. Its service brands include KNOWHOW in the United Kingdom, Ireland and the Nordics, and Geek Squad in the United Kingdom, Ireland and Spain. Its Business-to-business (B2B) services are provided through Connected World Services, CurrysPCWorld Business and Carphone Warehouse Business. more »

LSE Price
267.7p
Change
-0.9%
Mkt Cap (£m)
3,088
P/E (fwd)
7.9
Yield (fwd)
4.4



  Is AO World fundamentally strong or weak? Find out More »


5 Posts on this Thread show/hide all

TMFMayn 7th Dec '16 1 of 5
1

B. 33% of its gross proceeds went to various financial institutions, which is a high percentage to list in the LSE;

the IPO-fees-to-proceeds ratio seems to bea useful ratio that I have not considered before

I suppose for AO, you may have to adjust for the fact that the selling shareholders raised £349m after fees of £14.5m. I reckon total money raised for AO and its shareholders was £423m, from which fees of £34m were paid. So a ratio of about 8%.

Pets at home's IPO document is a bit contradictory, (sections E.1 and E.2a), but going with E.1 and a net £284m for the company and a net £26m for the selling shareholders, we get £310m. Fees of £40m take it to £350m. So £40m of £350m gives 11%.

With boohoo, it appears the company raised £300m gross and paid fees of £14m, and there were no selling shareholders. So a 5% ratio.

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Orangetree 8th Dec '16 2 of 5

In reply to TMFMayn, post #1

Surprise not to pick up on that, thanks, TMF Mayn.

Blog: Walbrock Research
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Orangetree 8th Dec '16 3 of 5

In reply to TMFMayn, post #1

Am I right to assume if these shareholders were to sell, the net proceeds go to AO World's bank balance?

Blog: Walbrock Research
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TMFMayn 8th Dec '16 4 of 5
1

In reply to Orangetree, post #3

"Am I right to assume if these shareholders were to sell, the net proceeds go to AO World's bank balance?"

No, the selling shareholders pocket the money themselves. 

I looked at the total money raised (i.e. proceeds for company + proceeds for selling shareholders) versus total fees as I thought the fee ratio might be different to just assessing the money raised by the company and company-paid fees.

Anyway, the gist of your fee analysis is correct -- AO (the company) did appear to pay a thumping great fee for the IPO, and did not receive that much in return. In fact, you have to wonder whether the company shouldered some of the costs for the selling shareholders.  

And it does make you wonder about the motivation about AO's IPO and the pricing (at least in retrospect).


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Orangetree 8th Dec '16 5 of 5

In reply to TMFMayn, post #4

My initial thoughts were they paid a high fee to obtain this grotesquely high valuation. Also, by stating it made £6m in profits (2013 data) "baited" the retail investors because the next three years saw it report an aggregate loss of £18m!

Blog: Walbrock Research
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