ASOS PLC (LON: ASC) – Accelerating the brands’ strategy with financially attractive transactions.

ASOS PLC is the FTSE AIM UK 50 Index listed fashion retailer (United Kingdom-based), operating globally. It was founded in the year 2000 and serving with over 850 brands and 85,000 products and catering to 24.5 million active customers. The Company has a worldwide distribution and enhanced localization. It is targeting the United Kingdom and accelerating business in the European Union and the United States. During 2020, its website attracted 280.4 million visits.

(Source: Presentation, Company Website)

Growth Prospects and Risk Assessment

With anticipated PBT benefits of at least £40 million in H1 FY21, PBT is now expected to be better than the market expectations. Meanwhile, capex guidance increases to £190 million, reflecting investment into US automation. Overall, ASOS is well-positioned to capture the global opportunities despite the short-term uncertainties through continuous development in customer base, ASOS brands and ASOS platform. It` has hired a new CCO, to accelerate the next stage of growth. Therefore, the improvement in capabilities shall provide business resilience and agility. Moreover, warehouse capacity is operating at a normal level which makes the Company well-set for peak trading. The Company expects to deliver continuous improvement in underlying profit in FY21 and beyond.

However, the market will remain challenging as customers make a fundamental shift towards the online marketplace. Though the Company has acknowledged the challenge, the evolution would not be easy without cost. Moreover, the push towards online sales has increased the variable costs, such as warehouse picking and delivery costs, has increased. In the near future, the Company is also likely to face the saturation of the e-commerce market and the increased aggressiveness of the competitors’ actions. Furthermore, the operations are impacted negatively due to the uncertainty created by the Brexit. In the near term, business operations may be impacted due to COVID-19 Pandemic uncertainty and lockdowns in many areas.

Industry Outlook Dynamics

With relentless demand in the past 12 months, the global online fashion market is valued over £220 billion. In the wake of Covid-19 contagion and its subsequent measures related to lockdown can impact the production in short-run, while e-commerce sales have the potential to sustain in such a challenging scenario. However, for sustainable fashion, the key area to focus on is ‘Carbon Emission’, since the fashion industry impacts the environment most, next to the oil industry.

 (Source: Presentation, Company Website)

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of ASOS Plc.

Recent Developments

On 1 February 2021: The Company announced the acquisition with Topshop, Topman, Miss Selfridge and HIIT brands, with consideration of £265 million. The Company believes that it would be a great opportunity to acquire strong brands with a well-connected customer base.

Trading Update (for the four months ended 31 December 2020, as on 13 January 2021)

(Source: Company Website)

• The Company delivered a strong peak trading performance, with an increase of 23% YoY in Group Sales.
• During the period, the revenue growth surged from the previous expectation. The growth was driven by strong consumer demand for the products and investment in product, pricing and marketing initiatives.
• The Company saw good growth in new customers, with an increase in the active customer base of 1.1 million to 24.5 million.
• As per the territory performance, the Company saw a growth in the UK and EU, while also showing increased momentum in the US and good growth in Australia and the MENA region.
• It delivered strong net cash position and better operational agility by reshaping product offers.
• Overall, ASOS is well-positioned to capture the global opportunities despite the short-term uncertainties through continuous development in customer base, ASOS brands and ASOS platform.
• The Company expects PBT for FY2021 to be at the top end of the market expectations.
• Meanwhile, capex guidance increases to £190 million, reflecting investment into US automation. Therefore, the improvement in capabilities shall provide business resilience and agility.

Financial and Operational Highlights (for the year to 31 August 2020 (FY20), as on 14 October 2020)

(Source: Company Website)

• The Company delivered a strong performance across the year, with an increase in total sales 19% year-on-year and profit before tax of 30%.
• As per the geographical segments, the UK, US, EU and ROW sales increased by 18%, 18%, 22% and 18%, respectively.
• Despite the covid-19 crisis, the Company showed operational resilience and agility across the supply chain and warehousing.
• Driven by favourable return rates, the profitability for the period improved, with solid cash generation.
• ASOS managed to reduce non-strategic cost substantially, which resulted in sustainable improvements to profitability.
• The Company is continuously making an investment in infrastructure and technology. Moreover, the Company’s expansion will support the growth of the business and improve efficiency.
• The Company saw underlying improvements in working capital and lower capital expenditure.
• Overall, the Company’s business model is quite sustainable, with a proven track record of decent growth trajectory and strategic opportunities in the pipeline.

Financial Ratios (FY20)

Share Price Performance Analysis

On 9 February 2021, at the time of writing (before the market close, at 8:05 AM GMT), ASOS’ shares were trading at GBX 4,997.00, up by 2.21% against the previous day closing price. Stock 52-week High and Low were GBX 5,548.00 and GBX 975.20, respectively.

From the technical standpoint, 5-day SMA (4,760.68), and 100-day EMA (4,657.32) are supporting the upside potential. 

In the last one year, ASC’s stock price has remained resilient with a positive return of ~46.38%; it has significantly outperformed the FTSE All-Share General Retailers and FTSE AIM UK 50 index with a positive return of nearly +5.86% and +24.90%, respectively.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook Scenario

The recent acquisition of Topman, Topshop, Miss Selfridge and HIIT brands will accelerate multi-brand platform strategy. Further, the Group expects the deal to yield a double-digit return on capital in the first full year. For FY21, PBT is projected to be at the top end of market expectations with net COVID PBT benefit of at least £40 million in H1 FY21. Moreover, the Group has signed a lease on 4th fulfilment centre in Lichfield, while US fulfilment centre is set to begin this year. Also, in order to increase investment into US automation, capex guidance for FY21 has been increased by £20 million to around £190 million. Furthermore, the Company has maintained a strong net cash and balance sheet position to capture the upcoming market opportunities.

 (Source: Presentation, Company Website)

Considering the strong profit & cash generation capabilities, sustainable business model, strong retail sales growth across all territories, higher profitability margins, strong customer acquisition, encouraging sales levels, sturdy signs of progress, robust demand through lockdown, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on ASOS Plc at the current price of GBX 4,997.00 (as on 9 February 2021, before the market close at 8:05 AM GMT), with lower-double digit upside potential based on 40.61x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

 

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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