ASOS PLC

ASOS PLC (LON: ASC) is an 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.

Investment Rationale for Valuation – SELL at GBX 2,627.00

• The Company closed the year with a lower net cash position of £199.5 million as of 31 August 2021 when compared with £407.5 million as of 31 August 2020.
• The Chief Executive Officer, Nick Beighton, had agreed to step down from an immediate effect.
• The ongoing supply chain disruptions and higher logistics costs had prompted ASOS to anticipate a drop in the adjusted profit before tax of approximately 40% during FY22.
• The Bank of England had recently mentioned that the global equities sell-off would have an adverse impact on UK Equities.
• The stock price is highly volatile as it plunged by almost 56% in the last one year.
• According to the Confederation of British Industry (“CBI”), the UK retail sales growth witnessed a six-month low during September 2021.
• From a technical standpoint, the MACD line remained lower than the signal line, indicating a correction in the stock price.

Key Risks

• The rising treasury yields might keep investors away from the global equities.
• The Company had warned of constrained supply from several partner brands.
• The push towards online sales has increased the variable costs, such as warehouse picking and delivery costs.
  

Recent Developments 

Changes in Board: On 11 October 2021, ASC updated that Nick Beighton had decided to step down as CEO with immediate effect. 

FY21 Financial Highlights (for twelve months ended 31 August 2021, as of 11 October 2021)

(Source: LSE Website)

• ASC’s revenue grew by around 22% at constant currency, with H1 FY21 benefitted from significant lockdown restrictions.
• On the profitability front, the adjusted profit before tax had shown a significant increase of approximately 36% during FY21.
• The active customer base grew by around 13% to 4 million during FY21.

One Year Share Price Chart

 (Source: REFINITIV; Analysis done by Kalkine Group)

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

Conclusion

The top-line revenue and bottom-line profitability witnessed a decent jump during FY21 despite of adverse circumstances. The strategic partnership with Nordstrom would drive the revenue growth of Topshop brands in North America during FY22. ASOS aimed to achieve a decent top-line revenue growth ranging from around 10% to approximately 15% for FY22 despite facing supply chain constraints.

Meanwhile, the Company had planned to incur a Capex investment of £210 million towards the technological advancement & automation of Lichfield and Atlanta fulfilment centres. However, the Company had issued a profit warning because of rising supply chain disruptions, and the CEO decided to step down. Thus, it would be prudent to sell this stock at the current levels. The stock made a 52-week low and high of GBX 2,300.00 and GBX 5,994.95, respectively.

Based on the rising supply chain disruptions, UK retail sales growth slowdown during September 2021, profit warning for FY22, stepping down of CEO, and unfavourable valuation as done using the above method, we have given a “SELL” recommendation on ASOS PLC at the current market price of GBX 2,627.00 (as of 11 October 2021 at 09:44 AM GMT+1), while we will suggest reinvesting when the new CEO gets appointed.

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

*All forecasted figures and Peers/ Industry information have been taken from REFINITIV.

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