- Positive news flow from electrical retailer continues
- AO World delivering sustained margin improvements
- Customers remain resilient despite cost-of-living pressures
Shares in AO World (AO.) rallied 20% to 67.6p after the online electrical retailer upgraded profit guidance for the third time since November in another unscheduled trading update.
Despite headwinds from inflation and cost-of-living pressures, the web-based washing machines, televisions, laptops and mobile phones seller’s fresh focus on profitability is evidently paying off and AO World continues to see ‘traction’ from management’s initiatives to reduce costs and improve margins.
THREE IN A ROW
AO World now expects adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) for the year to March 2023 to be in the £37.5 million to £45 million range.
That is significantly ahead of the guidance given in January for earnings in the £30 million to £40 million range and represents the third upgrade from Bolton-headquartered AO World since November.
Following last year’s £40 million fundraise, AO World set out its intention to drive operational efficiencies of at least £25 million, grow sales by an average of more than 10% per year and generate an EBITDA margin north of 5% in the medium term with improved cash generation.
And shares in the fallen lockdown winner led by CEO John Roberts have steadily recovered in recent months, investors impressed by progress with its pivot towards profitability, cash generation and cost reduction since the start of the current financial year.
‘Margin improvement initiatives coupled with a continued resilient underlying customer base has driven higher retail gross margins than previously expected,’ explained AO World in today’s brief statement, adding ‘we anticipate that this will continue for the remaining five weeks of the financial year.’
Steps taken to simplify the business and become more efficient have ‘outperformed expectations and been delivered quicker than expected’, insisted AO World, while mobile RPI price increases have also been ‘slightly higher’ than the company’s prudent forecast.
BROKER VIEWS
Numis Securities, which has a 100p price target for AO World, said: ‘With management delivering on self-help momentum, clear evidence of competitive rationality and exposure to less volatile categories, we reiterate our “Buy” recommendation.’
Shore Capital commented: ‘Today’s update, we sense, represents positive progress towards this goal and should help to rebuild negative sentiment towards the stock as the cost base is rationalised and management refocus on UK earnings growth having disposed of German operations during the period.
‘For now, we still prefer Marks Electrical (MRK:AIM) given its high quality earnings stream and meaningful profit before tax margin of safety. However, we look forward to April, where we will get closure on the quality of these guidance upgrades and what this means for cash burn.’
