Online electrical retailer AO World’s (AO.) shares surged 15.2% to 266.75p as a strong, surprise update confirmed continued positive momentum during a more challenging second quarter which saw consumers able to return to rivals’ brick and mortar stores.
Bolton-headquartered AO’s group revenues for the half year to September are now expected to be ‘in the region of £715 million’. That represents impressive 57% year-on-year growth, with UK sales up roughly 54% and the rapidly-growing German business on its way to sustainable profitability too.
DELIVERING THE GOODS
Investors appear especially impressed with AO World’s second quarter performance given the more challenging set-up. While the first quarter benefited from the first wave of lockdown, which shifted buying habits online and drove buoyant sales of everything from fridge-freezers to washing machines, competitors reopened stores and consumers returned to physical shops during the second quarter.
This tested AO World’s ability to sustain positive sales momentum, but the company passed with flying colours and its heavy emphasis on providing best-in-class customer service continues to pay off handsomely during this pandemic.
GENERATING GERMAN EFFICIENCY
Today’s other positive is the progress flagged at the German business, where first half sales sparked up 83%, driven by the impact of Covid on demand for online shopping as well as changes made to the business over the past 18 months.
AO World is now confident the German operation will ‘achieve profitability on an adjusted earnings before interest, taxation, depreciation and amortisation (EBITDA) monthly basis as we trade through our peak period and will be profitable in full year 2022 and thereafter’.
Founder and chief executive John Roberts said the last six months of trading have been ‘like no other during my two decades in the business. AO was in good shape coming into this financial year and the global, structural shift in customer behaviour to online, accelerated by Covid, emphasised our strengths.’
Whilst mindful of the uncertain economic climate, Roberts insisted ‘we are on track with plans and well set for our biggest ever peak trading period in the UK and Germany.’
THE EXPERTS’ VIEW
Russ Mould, investment director at AJ Bell, commented: ‘Ongoing lockdown restrictions provide the tailwind that AO needs as it continues its path towards making a profit. And herein lies a big issue - everything to date has been about driving sales growth but the business hasn’t really made any proper money. That could soon change.
‘Results for the year to 31 March 2020 saw a tiny pre-tax profit of £1.5 million which was the first proper earnings breakthrough for the business. Analysts now expect pre-tax profit to start motoring ahead, with £36.6 million forecast in the current financial year and £43.6 million in 2022.’
Bullish on AO World’s prospects, Numis described this as ‘a very encouraging update, with the stickiness of demand pointing towards a beneficial step change in mind and market share across categories, and progress in Europe pointing to a far greater opportunity.’
Reflecting on this year’s stellar share price run however, Shore Capital reiterated its ‘hold’ rating on AO World. ‘Despite the strong first half trading, we think that the shares look fairly valued today but highlight that the confirmation of German profitability in the second half on a monthly basis is an important milestone for the company.’
