AO World PLC

AO World PLC (LON: AO.) is an FTSE 250 listed electrical retailer, which sells small and major domestic appliances and consumer electronics.

Investment Rationale – SELL at GBX 106.20

• Products Shortage: The Company had warned of shortages of electrical products and delivery drivers before Christmas 2021.
• Volatile Stock Price: The stock price plunged almost 72.94% on a 1-year basis and around 73.87% on a YTD basis.
• Increased Competition: The increased competition witnessed in the German online market had adversely impacted the top-line business during H1 FY22.
• Reduced Revenue Guidance: The Company had anticipated FY22 revenue growth to be flat to negative 5% year on year.
• Increase in Net Debt: The net debt increased from £28.1 million as of 31 March 2021 to £102.2 million as of 30 September 2021.
• Unfavourable Technical Indicators: From a technical standpoint, the 20-days exponential moving average of GBX 133.54 indicates a correction in the stock price.

Key Risks

• Supply Chain Disruptions: The supply chain disruption and shortage of lorry drivers can impact profitability in FY22.
• Low Volumes: The operational leverage was impacted in the UK and Germany due to lower volumes.
• UK GDP: The UK economy witnessed a slowdown as the GDP grew quarter-on-quarter by around 1.30% during Q3 2021, which remained merely lower-than-expected growth of around 1.50%.
• Rise in Interest Rates: New Zealand came up with a second interest rate hike in the last two months. Moreover, rising inflation worldwide had put pressure on several Central Banks as they struggled to curb it.
  

H1 FY22 Financial Highlights (for the six months ended 30 September 2021, as on 23 November 2021)

(Source: Company result)

• Top-Line Revenue: The Group revenue went up by around 6% year-on-year in H1 FY22; however, the growth was impacted by the ongoing disruption in the global supply chain.
• Weak Profitability: AO. had reported an operating loss of negative £11 million for H1 FY22, while it had reported a significant operating profit of around £16 million for H1 FY21.
• Guidance: The Company had expected Group Adjusted EBITDA ranging from £10 million to £20 million for FY22.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)

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

Conclusion 

AO slipped into net loss during H1 FY22 and reported an increase in net debt. AO World had lowered down its profitability guidance for FY22 due to the supply chain constraints and shortage of products. AO had issued a second profit warning in two months due to a shortage of electronics such as Apple’s iPhone and games consoles, including Sony’s PlayStation and Microsoft’s Xbox. Thus, it would be advisable for the clients to liquidate the position at the current levels on this Company based on their risk appetite. The stock made a 52-week High and Low of GBX 444.50 and GBX 87.50, respectively. 

Based on the recent profit warning, shortage of products, and unfavourable valuation conducted above, we have given a “SELL” recommendation on AO World PLC at the closing market price of GBX 106.20 (as on 23 November 2021). 

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

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

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