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AO World – interims argue “remain confident”… but can the high growth company rating really be justified?

By Steve Moore | Tuesday 20 November 2018


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.


Online electrical retailer AO World (AO.) has announced results for its half-year ended 30th September 2018, emphasising “continued revenue growth with total revenue for the period increasing by 9.9% to £404.2m (2017: £368.0m) and “remain confident of achieving long-term sustainable growth across the group”. The shares have responded, er... currently more than 5% further lower, below 120p. Hmmm…

From the vanity of revenue, the “Financial Highlights” move onto “Group Adjusted EBITDA losses reduced to £5.4m (2017: £6.3m)” – with “Europe Adjusted EBITDA losses reduce to €13.8m (2017: €15.6m)”. That with Europe revenue +35% to €78.4 million (£69.4 million). However, UK revenue was £334.8 million – reflecting its relative maturity, though “UK Adjusted EBITDA of £6.9m (2017: £7.4m) impacted by lower than anticipated MDA sales and the expected dilutive gross margin percentage impact of growth in our newer categories”.

The company notes “a declining UK MDA market… we take encouragement that we are at least maintaining market share in this core category in the UK and growing significantly in Germany”. However, is maintaining market share in a declining core market and what that - and also Germany “challenging MDA market” - suggests for its future in the European markets really sufficient for a presently still high growth company rating? – the market cap still at the moment not far off £550 million. That is also with the results showing a swing to a net current liabilities position and net cash £14.4 million lower (another example of the bullshit earnings nature of EBITDA) to £23.9 million.

Furthermore, “we were delighted to announce the proposed acquisition of Mobile Phones Direct Limited earlier this month… total consideration of approximately £38.1m (plus interest)… approximately £20.9m (plus interest) in cash”. AO notes “availability of a £60m revolving credit facility and, assuming the acquisition of Mobile Phones Direct completes… £24m term loan facility” – but the overall position doesn’t exactly comfort. Indeed, I noted on the Mobile Phones Direct acquisition announcement, margin pressures – and that with the dilutive gross margin newer categories mentioned above. Additionally, I note on these results;

  • a UK trade and other payables reduction noted to be “reflecting a tightening of credit”
  • “our stock days may increase in the short to medium term as we look to mitigate any friction in the supply chain that Brexit may yield to ensure availability to customers”;
  • “potential impacts of Brexit (including a reduction in sales growth, a reduction in margin and effects on stock levels) together with a reduction in trade payables (due to further tightening of credit insurers)”;
  • “we expect full year results to fall within the range of board expectations, albeit more second half weighted than previously anticipated”.

With it also already admitted “the UK MDA market becoming tougher than expected” and also in Europe “a continuingly tough macro trading environment”, it’s good luck with that “more second half weighted” (and - given all the above - indeed with “achieving long-term sustainable growth across the group”)! The stance remains sell.


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