Boohoo Group Plc

Boohoo Group Plc (LON: BOO) is listed on the FTSE AIM All-Share index. It is an online fashion retailing company.

On 30 September 2021, BOO would release its interim results for FY2022.

Investment Rationale for Valuation – Speculative Buy at GBX 274.10

• The Company recently announced that it would invest more than £500 million in the UK in the next five years.
• BOO has partnered with Alshaya Group to expand the presence of Debenhams brand in the Middle East.
• On the profitability front, BOO’s EBITDA margin since H2 FY2019 outperformed the industry median of 3.8%.
• On the liquidity front, BOO’s current ratio since H2 FY2019 outperformed the industry median of 1.53x.
• On the leverage front, BOO’s debt/equity ratio since H2 FY2019 has been lower than the industry median of 0.17x.
• In the last five years, the stock has outperformed the benchmark FTSE AIM All-Share index.
• On the technical front, the 14-day RSI at about 47.36 is moving towards the oversold zone, indicating a potential uptick in the stock price in the near term.

Key Risks

• There is strong competition in the sector with low barriers to entry. It could create cost pressures for the Company.
• There could be delays in the supply chain due to the delta variant of Covid-19 creating disruptions in the UK.
• Muted disposable income and lower consumer confidence could lead to a drastic change in consumer spending levels, affecting demand for the offerings of BOO.

Q1 FY2022 Trading Update (released on 15 June 2021)

(Source: LSE Website)

• During Q1 FY2022, BOO launched Debenhams digital department store. It also successfully integrated Burton, Wallis and Dorothy Perkins brands.
• Driven by these initiatives, BOO achieved YoY revenue growth of 32% in Q1 FY2022.
• The Company made £143.5 million of investments across infrastructure and offices in Q1 FY2022.
• It led to net cash of £199.1 million in Q1 FY2022, down from £276.0 million in FY2021.

One Year Share Price Chart

(Source: Refinitiv, Analysis done by Kalkine Group)

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

Conclusion

There is an improving outlook for the wider economy despite some uncertainty. The management takes confidence from the performance of the brand during challenging times and considers the Company as well-placed to maximise the opportunities for growth. The Company has substantial growth opportunities due to high traffic to online retailers.  Meanwhile, the stock made a 52-week low and high of GBX 215.00 and GBX 402.30, respectively.

Based on the significant investment by the Company, its digital growth prospects, further expansion into the middle-east region, better profitability, liquidity and leverage position of the Company than the industry, and support from valuation as done using the above method, we have given a “Speculative Buy” recommendation on Boohoo Group Plc at the closing market price of GBX 274.10 (as on 17 August 2021), with a lower double-digit upside potential based on 30.59x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

AO World Plc

AO World Plc (LON: AO.) is listed on the FTSE 250 index and an online electrical retailer. It is involved in selling electrical products and delivering them via an in-house logistics network.

On 29 September 2021, the Company would conduct its Annual General Meeting.

Investment Rationale for Valuation – Speculative Buy at GBX 222.20

• Due to the increasing digital trend in the UK, there could be more online traffic, driving the demand for the Company’s offerings.
• In FY2021, the Company acquired more than 2 million new customers.
• The Company, in FY2021, has reduced its net debt by 71% YoY.
• On the profitability front, the Company has a higher net margin than the industry median of negative 1.6% since H2 FY2019.
• On the technical front, the 14-day RSI at about 47.91 is sustaining above the oversold zone. Hence, there could be a potential uptick in the stock price in the near term.

Key Risks

• Any supply chain disruption could increase the cost of recycling and logistics, affecting the margins of the Company.
• Due to muted disposable income, customers could come under financial stress. Hence, there could be a loss of customers.
• Cyber-attacks on the Company’s systems could incur additional costs for the Company.

Financial Highlights (for the year ended 31 March 2021 (FY2021), as of 1 July 2021)

(Source: LSE Website)

• Driven by the continued rising trend in online shopping, the Company’s revenue in FY2021 surged by 62% YoY.
• It led to adjusted EBITDA rising by 191% YoY in FY2021.
• The impressive performance and the Company’s cash-accretive operations led to £60 million cash generation in FY2021. In FY2020, there was a reduction in cash of £22 million.
• Driven by the cash generation, net debt in FY2021 was down by 71% YoY.

One Year Share Price Chart

(Source: Refinitiv, Analysis done by Kalkine Group)

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

Conclusion

The Company has made significant progress in FY2021, with earlier investments offering solid returns. The management has the mission of making the Company the global destination for electricals. To fulfil key customer needs, the Company wants to invest back the generated cash into its business. The management strives to achieve further European expansion in the medium term. Meanwhile, the stock made a 52-week low and high of GBX 172.40 and GBX 444.50, respectively.

Based on the better profitability of the Company than the industry, its favourable prospect due to increasing digital trend, its continued investments in its business, and support from valuation as done using the above method, we have given a “Speculative Buy” recommendation on AO World Plc at the closing market price of GBX 222.20 (as on 17 August 2021), with a lower double-digit upside potential based on 58.86x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

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

*The reference data in this report has been partly sourced from Refinitiv.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

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