Are ASOS plc, AO World PLC And Associated British Foods plc A-Star Retail Investments?

G A Chester looks at the business fundamentals and valuations of ASOS plc (LON:ASC), AO World PLC (LON:AO) and Associated British Foods plc (LON:ABF).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Retailers ASOS (LSE: ASC), AO World (LSE: AO) and Primark — which is owned by Associated British Foods (LSE: ABF) — are all expanding aggressively in international markets. Does the potential for high growth abroad make these three companies A-star investments?


ASOS has been one of the AIM market’s great success stories. When the online “fast fashion” firm listed on London’s junior bourse in 2001, the business was valued at £12m. Today, the company has a market capitalisation of £2.7bn.

ASOS’s international expansion has seen it develop nine local language websites, and open warehouses in the US, Europe and China. The company’s web and social media hub is an ever-expanding “community” of loyal, passion-for-fashion customers.

ASOS’s shares clearly got ahead of themselves early last year, when they reached a high of over 7,000p. During the course of the year revenue and profit growth in the international business had a bit of a stumble. Capital expenditure on expansion was higher than previously guided, and there were problems with pricing and foreign exchange rate movements.

When I looked at ASOS in June, the share price was 2,750p, and I thought a valuation of 2.3x forecast 2014 sales and 64x earnings wasn’t outrageous for a top-notch business going through some growing pains. At today’s price of 3,236p, the sales and earnings multiples are 2.8x and 73x, respectively; so, the valuation’s a bit less attractive now.

AO World

Online white goods retailer AO World was floated on AIM just over a year ago, with plans to expand into Europe. The company has recently set up in Germany, and the infrastructure it has built can also be used to service Belgium and the Netherlands.

I rate AO World a lower-quality business than ASOS. The domestic appliances market is intensely competitive, so margins are low; and while ASOS has built a community of “sticky” customers, people just aren’t as passionate about dishwashers and fridges.

I took a close look at AO World’s valuation in December when the shares were trading at 250p. I concluded that an EV/EBITDA of 67x was way too high. Last week, the company issued a profit warning (due to performance in the UK, rather than in Germany). The shares crashed, and are currently changing hands at 180p.

I used trailing 12-month EBITDA of £15.1m in my December valuation, but I’m now going to use the company’s guidance of £16.5m for the year ending 31 March. The fall in the market value of the company and the higher EBITDA give an EV/EBITDA of 45x. That still looks pricey to me, given, as I mentioned earlier, the nature of the industry in which AO World operates.

Associated British Foods

Primark is the jewel in the crown of Associated British Foods (ABF). The affordable fashion phenomenon is responsible for 60% of group operating profit, the remainder coming from ABF’s four other divisions (grocery, sugar, ingredients and agriculture).

Primark continues to grow in the UK, but is growing even faster abroad. The company’s “highly successful” entry into France during 2014 brought the number of countries in which the business operates to nine. In 2015, the first Primark stores will open in the north-east of the US.

I’ve long been an admirer of ABF. This £25bn conglomerate typically looks expensive on conventional earnings metrics, but Primark has a proven, successful format, and what analysts call a long “growth runway”. International expansion can drive double-digit growth for the next 20 years.

At a current share price of 3,125p, ABF trades on 30x forecast earnings for the year ending September 2015. The valuation is a little higher than the company’s usual premium rating, so there may be an opportunity to buy at a lower price than the current level.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester has no position in any shares mentioned. The Motley Fool UK owns shares of ASOS. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

3 diverse FTSE stocks I’d consider buying to invest in Asia

This trio of FTSE shares could be the perfect way to invest in the fast-growing economies of Asia over the…

Read more »

many happy international football fans watching tv
Investing Articles

6.4% yield! Is ITV a dividend stock to consider buying during the Euros?

Our writer takes a look at ITV and assesses whether the FTSE 250 dividend stock might be a good fit…

Read more »

Illustration of flames over a black background
Investing Articles

Up 915% in a decade! This growth monster may also be the best FTSE income stock of the lot

Harvey Jones has been watching this top FTSE 100 growth and income stock for months and now he's found another…

Read more »

Investing Articles

The tax-free route to millionaire portfolios

• Although annual ISA subscriptions are capped, ISAs are an undoubtedly serious wealth-building tool: you can build serious wealth.

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Will FTSE 100 shares soar 35% after the general election?

Royston Wild explains why FTSE 100 shares might be about to soar, and discusses a top penny stock that could…

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Investing Articles

After gaining 34% in a month, is the Nvidia share price now uninvestable?

Our author says the Nvidia share price is very high at the moment. He's cautious when considering investing in the…

Read more »

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

This under-the-radar FTSE 100 share has hiked dividends 13.7% a year for a decade. Time to buy?

Harvey Jones is kicking himself for missing out on this FTSE 100 share that's kept investors happy with long-term share…

Read more »

British union jack flag and Parliament house at city of Westminster in the background
Investing Articles

Labour winning the general election would be positive for UK stocks, says JP Morgan

One mega-bank thinks certain UK stocks could benefit following the 4 July election. This writer considers a FTSE share that…

Read more »