Low margins, high valuation
AO World (LSE: AO) released a pre-close trading update for its financial year ending 31 March, which saw its shares rise by as much as 15% to 198p in early trading.
The online retailer of major domestic appliances reported UK fourth-quarter sales and earnings “ahead of our expectations”. The company said it expects full-year UK revenue growth of around 18.5% (AO.com 27%) and UK adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) of about £17m.
UK revenue growth the previous year had been 22.3% (AO.com 33%), so growth is slowing, although still impressive. However, the EBITDA performance is considerably less impressive: following last year’s £16.5m (up 47% on the previous year), this year’s £17m represents growth of just 3%. It has taken £87m of additional revenue to add £0.5m to EBITDA.
Meanwhile, AO is loss-making in Europe, where its entries into Germany and, more recently, the Netherlands are still in the early stages of building scale. There were no numbers on European revenue and EBITDA in today’s update.
The shares have come off their early-morning 198p high and are currently trading at 182p, giving a market capitalisation of £766m. I don’t believe this low-margin business merits that valuation, and AO remains a ‘sell’ in my view.
Speedy Hire (LSE: SDY) also released a pre-close trading update for its financial year ending 31 March this morning. The shares of the tools and plant hire group have recovered to 38p, having fallen by as much as 8% in early trading.
While the company confirmed that full-year profit is anticipated to be in line with market expectations, the Board said it will be writing off £45m of goodwill on the balance sheet — a non-cash item.
In a competitive environment, Speedy Hire is in the process of implementing a number of measures to attract and retain customers, improve operating efficiencies and reduce the cost base.
The shares are trading on over 50 times expected earnings for the year just ended, falling to 25 times for the year ahead. That seems a rather full valuation to me at this stage.
Hard to value
Metal Tiger (LSE: MTR) shares shot up 17% in early trading this morning. They’ve fallen back a little since, and are changing hands at 3.9p, as I write, giving the company a market capitalisation of about £19m.
I haven’t previously taken a look at Metal Tiger, which is focused on mineral exploration and development. First impressions:
- It’s not the most straightforward business, having one arm investing directly in metal projects, and another trading in other resource companies’ equities, warrants, royalties and so on.
- The company is a prolific issuer of Regulatory News Service (RNS) announcements, with the company releasing no fewer than 29 statements during March, which may be some kind of record.
- There is much to be “extremely positive“ about, which has the Metal Tiger team “very excited and enthused”, as it goes about its mission of targeting “a very high return for shareholders”. Meanwhile, a recent share purchase by the chairman’s wife is apparently “a positive validation of the Company’s business model”.
The nature of the business, the plethora of RNS announcements, and the excitable tone of the director-speak don’t immediately strike me as appealing. Metal Tiger may or may not deliver, but I’d want to work through the valuations of the company’s sizeable number of projects and assets in the trading arm, before considering investing.