The move to online shopping has been the big structural shift for the retail industry in recent years. Buying the right company at the right price in this arena could give investors a fantastic return.
With this in mind, I’ve been having a close look at three digital specialists: fashion etailer Boohoo (LSE: BOO), web grocer Ocado (LSE: OCDO) and online white goods seller AO World (LSE: AO).
The table below shows what I consider to be the key numbers as a starting point for looking at the three companies.
| Boohoo | Ocado | AO World | |
| Current share price | 26.5p | 378p | 178p |
| Market cap | £297.7m | £2,349.4m | £751.6m |
| Net cash | £54.1m | £33.0m | £43.9m |
| EV (market cap minus net cash) | £243.6m | £2,316.4m | £707.7m |
| Revenue | £139.9m | £948.9m | c. £472.5m* |
| Adjusted EBITDA | £14.1m | £71.6m | c. £16.5m* |
| EBITDA margin | 10.1% | 7.5% | 3.5% |
| EV/EBITDA | 17.3x | 32.4x | 42.9x |
* Company guidance for year ended 31 March 2015 (results due 2 June)
Boohoo
When I looked at Boohoo about six months ago, the shares were trading at 45p, the trailing 12-month EBITDA was £14.9m, and the EV/EBITDA valuation was 30.2x, which I thought was too rich.
The company issued a profit warning in January, and trailing EBITDA has subsequently dropped to £14.1m. However, the shares have been wacked to such and extent that the EV/EBITDA valuation has come down to 17.3x, which I think looks very attractive.
Boohoo is a strong business, run by savvy rag-trade veterans, with a loyal and rising customer base at home and abroad. The problems in the second half of last year boiled down to a delayed launch of the autumn/winter range, due to a new warehouse management IT system, and the unseasonably warm autumn weather that had an industry-wide impact. In short, the hiccup was not due to ingrained structural weaknesses with the business itself.
As it was, Boohoo still nailed 27% revenue growth for the year, and the analyst consensus is that the company can continue knocking out annual growth of about 25%, while maintaining the current EBITDA margin of 10%. So, for the year ahead, revenue would increase to around £175m and EBITDA to £17.5m, giving a forward EV/EBITDA of about 14x.
Ocado
Ocado’s current EV/EBITDA of 32.4x looks too rich to me. The company is increasing revenue at a slower rate than Boohoo — 20% last year, 15% for the first quarter this year, and about 15% annually expected going forward. Analysts see the EBITDA margin being maintained at around 7.5%, giving a forward EV/EBITDA of about 28 — double that of Boohoo.
There are also a couple of significant known unknowns for Ocado investors: there’s still no sign of a long-mooted deal with an international retailer that Ocado says it is “confident” of inking, while Waitrose — should it wish — has the opportunity to rescind its contract with Ocado in September.
AO World
I looked at AO World at the same time as I looked at Boohoo six months ago. AO World’s shares were trading at 250p, the trailing 12-month EBITDA was £15.1m, and the EV/EBITDA valuation was 66.8x, which I thought was way too rich.
Like Boohoo, AO World issued a profit warning early this year, and the shares plunged. But unlike Boohoo, AO World’s current EV/EBITDA valuation — 42.9x the £16.5m EBITDA guided by management — remains too high in my book.
Analysts reckon AO World can increase annual revenues at a somewhat higher rate than Boohoo’s 25%, but the white goods retailer operates in an inherently low-margin business. Furthermore, AO World’s expansion into the audio-visual segment won’t help margins and I think there are greater execution risks for AO World than Boohoo in international expansion. Furthermore, selling extended warranties is an intrinsic part of AO World’s business, and profitability could suffer in the event of any adverse change in legislation on the selling of product protection plans.
