ASOS Plc

ASOS Plc (LON: ASC) is a UK listed fashion retailer, operating globally. The Company is catering to over 20.3 million active global customers with product portfolio consists of roughly 800 brands.

Rationale for Valuation – Speculative Buy at GBX 4,830.00

• ASOS has decent fundamental metrics as it has maintained a Gross margin above 45% and a ROE above 10%.
• Strong sales growth was seen in the financial year 2020 across regions as sales of UK, EU, US, and ROW were up by 18%, 22%, 18%, and 18%, respectively.
• In the last one year, the Company has delivered a sparkling return of ~17%, which was higher as compared to the FTSE AIM UK 50 Index.
• From the technical standpoint, shares were trading well above the short-term support level of 20-day (approximately GBX 4,567.55) simple moving average price, which reflects an uptrend in the stock.

Key Risks

• Due to the Covid-19 pandemic, the Company’s operational performance could be impacted due to disruption in the supply chain.
• The Company can face an additional cost-pressure for resolving supply chain malpractice as 60% of their products get manufactured in overseas markets.

Financial Highlights (for the year to 31 August 2020 (FY20), as on 22 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%.
• 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.

Three Months Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

Looking ahead, the Company remain well-positioned to capture the global opportunity through the continued development of the ASOS platform, the ASOS brands, and the ASOS customer experience. Further, the Company expects to continue to deliver improved underlying profit. ASOS managed to reduce non-strategic cost substantially, which resulted in sustainable improvements to profitability. Meanwhile, the Company has shown a strong financial performance in the financial year 2020, with higher profitability margins. ASC 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 stock made a 52-week low and high of GBX 975.20 and GBX 5,548.00, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Speculative Buy” stance on ASOS at the closing market price of GBX 4,830.00 (as on 30 December 2020), with lower double-digit upside potential based on 46.95x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

Camellia Plc

Camellia Plc (LON: CAM) is a FTSE AIM 100 index listed Company, which is involved in agriculture, food, and engineering services. Its crop includes tea, macadamia and avocado.

Rationale for Valuation – Speculative Buy at GBX 7,075.00

• As per valuation metrics, EV/Sales multiple is currently lower than the Food & Tobacco industry.
• The debt/equity ratio recorded by the Company in the past two years was considerably below the industry median. In H1 FY20, the debt/equity ratio was 0.06x.
• From the technical standpoint, shares were trading well above the short-term support level of 50-day (around GBX 6,811) simple moving average price, which reflects an uptrend in the stock.

Key Risks

• The price fluctuations in tea prices can impact cash flows and profitability.
• The extreme weather conditions can significantly impact agriculture production.
• The Covid-19 pandemic can raise oversupply and demand concerns.

Trading Update (as on 21 October 2020)

• For FY20, the Company expects an underlying profit before tax to be marginally in excess of £10 million and also exceed the market expectations.
• In Bangladesh, higher than expected wage agreement offset the better than expected tea prices.
• While the remaining operations continue to trade broadly in line with anticipations.
• Moreover, the tea production in Kenya has been higher than the expected while the average selling prices for tea remained higher than in FY19.

Three Months Share Price Chart

  (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative) 

Conclusion

In November 2020, the Company confirmed the completion of the sale of the Horizon Farm property, for a gross cash consideration of US$31 million. The underlying profit before tax in FY20 is expected to be higher than £10 million, despite the volatile market environment. Moreover, H2 FY20 results are expected to be significantly higher than H1 FY20. The disposal of the Horizon Farm property shall bring the underlying profit before tax in FY20. In the long-term, business prospects appear to be bright, which is giving an opportunity for investment. Also, CAM remained in good shape to tackle the impact of Covid-19 pandemic and will emerge even stronger once the current crisis is passed. Overall, the Company is fundamentally strong, and the demand for its agricultural product is enduring. The stock made a 52-week low and high of GBX 6,155.94 and GBX 8,864.55, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Speculative Buy” stance on Camellia at the closing market price of GBX 7,075.00 (as on 30 December 2020), with lower double-digit upside potential based on 0.80x EV/NTM Sales (approx.) on FY20E sales (approx.). 

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

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

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