ASOS - at £38.99 the fashion is better value than the shares

ASOS: Given the date, I thought I could delve into a stock with no dividend history and no dividend expected within analysts’ forecast horizon. ASOS has already packed a lot into its young life, with the Buncefield fuel depot explosion just before Christmas 2005 worthy of many a soap opera script. Another soap episode was the warehouse fire last summer and Christmas 2014 was marked by a web-site meltdown. Yet, through all this, the premise of selling affordable fast young fashion on-line, whilst adding more geographies, has been successful, with the group maintaining what many would see as a break-neck pace of expansion. Their skill is, partly, that the operational side of the business has kept up with all this. These interims, to 28^th February 2015, show revenues and sales both up 14%. Within this UK sales grew 27%, whilst the overseas side grew by 5% (10% at constant currency). Group gross margins came down by 270bps to 46.8% as they rolled out the zonal pricing model and invested in the international price offer and infrastructure, leaving pre-tax profits down 10% at £18.0m and diluted eps down 5% at 17.6p. Cash balances totalled £64.9m, up from £36.9m a year ago, but down from £74.3m at the last year-end, due to capex of £27m offset by tighter working capital control and insurance claim payments. The many operational improvements included the introduction of automated fulfillment at the phoenix-like Barnsley site.

The outlook states they are trading in line with expectations, with the international business becoming more price competitive, whilst “momentum in the business is growing”. The next stated aim is an ambitious £2.5bn of sales as against the £1.1bn-£1.2bn expected this financial year. This £2.5bn target is again outside the published analysts’ forecast horizon, which extends to 31^st August 2017. If we pencil in 20% per annum sales growth the target will almost be reached in the year to 31^st August 2019. Profit growth may oscillate around this 20% mark as they invest in expansion, but if last year’s eps of 44p is matched this year, then 20% thereafter takes you to 91p in FY2019. The shares are sharply better today (and have more than doubled since their early autumn lows), but at £39 the FY2019 PE would be 42.9x. Although no dividend is forecast, it may well be that a modest payout might have started by then, but it won’t drive the investment case. If you believe in ASOS then a 2019 PE of 42.9x for 20% growth may be palatable, but it will come as no surprise that the rating is too rich for me. (Neil Cumming^, 1^st April 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower