Boohoo Group PLC

Boohoo Group PLC (LON: BOO) is a FTSE AIM 100 listed Online Fashion Retailing Company. The Company was founded in 2006 and has grown rapidly in the UK and internationally.

On 30 September 2021, Boohoo expects to release its interim results for FY22.

Rationale for Valuation – SPECULATIVE BUY at GBX 259.90

• During the last quarter, the Company also successfully integrated Dorothy Perkins, Wallis, and Burton brands. It also launched new Debenhams digital department store.
• It has a prominent online business model, and thus, it is strongly positioned to capture sales during the Covid-19 pandemic, while the lifting of lockdown restrictions and revival of the hospitality sector shall support the business further.
• The Company expects 25% revenue growth for the year to February 2022. The adjusted EBITDA margin for FY22 is expected to be in the region of 9.5-10%. The Group has made a strong start to the FY22, and medium-term guidance remained unchanged.
• From a technical standpoint, the stock price is nearly at the lower standard deviation of the Bolling Bands, while the 14-days RSI (~41.04) confirms the oversold position.
• Since FY17, Boohoo has maintained strong profitability margins as gross margin, operating margin and net margin have remained above 52.8%, 6.8% and 5.4%, respectively.

Key Risks

• The UK retailers have extended a losing streak as retail sales fell 0.9% in August 2021, albeit remained above the pre-pandemic level.
• The supply chain concerns have impacted the UK Manufacturing Purchasing Managers' Index in August 2021. It can derail the economic recovery and dampen the investors’ sentiments.
• The Company can face additional cost pressure to resolve supply chain malpractice as nearly 60% of its products are manufactured in overseas markets.
• There is also a risk associated with competition, changing demand patterns, change in technology, and negative perception of the brand.

Recent News

Response to media commentary: On 30 July 2021, Boohoo affirmed that it is committed to ethical compliance within its supply chain. It is working closely with local authorities and will take necessary actions to mitigate the risk of labour exploitation within its supply chains.

Trading Update for the three months to 31 May 2021 (as on 15 June 2021)

(Source: Company Website)

• Boohoo reported 32% year-on-year revenue growth in Q1 FY22, with a 2-year CAGR of 38%.
• The gross margin remained strong at 55% for Q1 FY22. At the end of quarter, net cash stood at £199.1 million.
• On 14 July 2021, Boohoo partnered with Alshaya in the Middle East to accelerate the building of the Debenhams brand.

One Year Share Price Chart

 (Data Source: Refinitiv, Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY22) (Illustrative) 

Conclusion 

Boohoo has shown phenomenal growth with a 91% increase in revenue over the past two years. Moreover, it continued to gain market share and maintained a compelling consumer proposition with several acquisitions, which shall cement its position as a leader in global fashion e-commerce. Boohoo has also conducted several acquisitions recently (Debenhams, Dorothy Perkins, Wallis, and Burton brands, PrettyLittleThing, Oasis and Warehouse), which shall support continued growth and profitability. The stock made a 52 week High and Low of GBX 402.30 and GBX 215.00, respectively. 

Based on favourable market drivers, increased active customers, prospects of recent acquisitions supported by the valuation conducted above, we have given a “SPECULATIVE BUY” recommendation on Boohoo Group PLC at the current market price of GBX 259.90 (as on 20 September 2021 at 11:00 AM GMT+1), with lower double-digit upside potential based 31.73x Price/Earnings (approx.) on FY22E Earnings Per Share (approx.).

ASOS PLC

ASOS PLC (LON: ASC) is a FTSE AIM UK 50 Index listed fashion retailer (United Kingdom-based), operating globally. It was founded in the year 2000 and serving over 850 brands and 85,000 products and catering to over 24 million active customers.

On 13 October 2021, ASC expects to publish results for the year ended 31 August 2021.

Investment Rationale – SPECULATIVE BUY at GBX 3,107.00

• Following the 45% reduction in operational carbon emissions per order from FY16 to FY20, ASOS has announced the next phase of operational carbon emissions per order, whereby it plans to achieve Net Zero carbon emission across the full value chain by 2030.
• Since H1 FY21, ASOS has increased the active customer base by 1.2 million to 26.1 million since HY21. The Board appears to be confident regarding global opportunity to grow given the strength of unique ASOS Brands, its experience, and platform.
• ASOS has a strong balance sheet and robust cash position to invest continuously to take advantage of upcoming global opportunities and navigate short-term uncertainty.
• On a forward 12-month basis – key valuation multiples (EV/Sales, EV/EBITDA, Price/Cash Flow and Price/Book) are undervalued against the Diversified Retail sector.
• From a technical standpoint, the momentum oscillator, 14-day RSI (~27.42) indicates an oversold signal, while the stock price is hovering around the lower Bollinger Band.

Risk Assessments

• As 40% of the UK Companies are facing recruitment difficulties, it can create operational challenges in the short-term.
• The UK inflation rate has jumped to 9-year higher in August 2021, which can keep the consumer sentiments subdued.
• Increased global supply chain pressures and volatile demand can keep the outlook uncertain in the short-term.
• The inflationary market conditions and rising input prices can also impact its operating costs and customer buying power. The push towards online sales has increased the variable costs, such as warehouse picking and delivery costs.
• In the near term, business operations can be impacted due to COVID-19 pandemic led restrictions and uncertainties.

Recent News

ASOS Chairperson Change: On 17 August 2021, Adam Crozier decided to step down as Chairman post accepting the role of Chairman of BT Group PLC.

Trading Statement (for the four months ended 30 June 2021, as on 15 July 2021)

 (Source: Company Website)

• Against a backdrop of continued restrictions, revenue growth was solid in the above-mentioned period.
• ASOS expects FY21 adjusted profit before tax to be in line with the management’s expectations.
• The Group maintained a strong balance sheet and cash position.
• Furthermore, the Company has maintained a strong net cash and balance sheet position to capture the upcoming market opportunities.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative) 

Conclusion

In the latest trading update, ASOS reported solid revenue growth, strong balance sheet, enhanced global opportunities, increased customer base, good flexibility to meet the demand, and greater brand awareness and customer engagement. Moreover, it is set to drive growth in North America with a strategic partnership announced with multi-channel retailer Nordstrom. However, the global supply chain environment pressures continued and might keep the short-term outlook volatile. Notwithstanding, the recent acquisition of Topman, Topshop, Miss Selfridge and HIIT brands will accelerate multi-brand platform strategy. The stock made a 52-week High and Low of GBX 5,994.95 and GBX 2,990.82, respectively.

Based on the revenue growth, solid growth in customer base, expected profit before tax, long-term market opportunity, and favourable valuation conducted above, we have given a “SPECULATIVE BUY” stance on ASOS PLC at the current market price of GBX 3,107.00 (as on 20 September 2021 at 09:27 AM GMT+1), with lower double-digit upside potential based on 25.00x Price/NTM Earnings (approx.) on FY21E 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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