AO World and Flybe/Stobart

Friday, January 11, 2019 - 10:17

“There is a positive end to the trading week with the FTSE 100 in touching distance of getting back over the 7,000 line. Oil prices find renewed strength with Brent crude up 0.7% and WTI crude up 1%, giving a lift to big FTSE constituents Royal Dutch Shell and BP. Housebuilders are also on the move with Taylor Wimpey and Barratt Developments among the stocks posting gains of 2% or more. “Only 23 FTSE 100 stocks were in the red on Friday including a handful of banks and utility providers. Next week sees the big recruitment stocks Hays and PageGroup update on trading, so too miner Rio Tinto and hotels group Whitbread,” says Russ Mould, Investment Director at AJ Bell.

AO World

“If you had to pick a retailer vulnerable to a poor Christmas trading update, AO World would have certainly made the list for many people given its troubled history. However, it somewhat surprises with a fairly decent performance in the last three months of 2018.

“Record sales in November were linked to running Black Friday deals for a longer period in November. Normally heavy discounting would have a greater benefit to revenue than profit. However, AO World says margins improved in the trading period. European sales growth also improved quarter-on-quarter.

“The key issue remains the lack of profit in the business. Sales growth is only positive if there is something left for the company after covering costs of goods and running the business. It still needs to increase scale in Europe and the UK market remains highly competitive which means a lot of money will have to be spent on marketing to make sure its brand is front and centre when consumers are thinking about where to buy their electrical goods.

“At the moment analysts don’t expect AO to a report a pre-tax profit until the financial year ending 31 March 2020. Investors have been patiently waiting for this magic earnings breakthrough moment even since the business joined the stock market five years ago.

“For now, investors should be very relieved there is no reason to downgrade earnings forecasts and that there is a new sense of momentum in the business.”


“Ouch, any Flybe shareholder hoping for a healthy premium from any takeover bid should look away now.

“A paltry £2.2m or 1p per share is being offered to investors in the company’s equity as part of the rescue deal unveiled by a consortium which includes Virgin Atlantic and Southend Airport-owner Stobart.

“To put that sum in context it compares with £215m valuation at IPO back in 2010 and even 12 months ago the regional carrier was valued by the market at closer to £100m.

“In some respects, the degree to which the market failed to anticipate such a bargain basement price is a surprise given the big profit warning in October which preceded Flybe’s decision to put itself up for sale.

“Volatile oil prices, strong competition and the uncertainty around Brexit have seen several failures among smaller airlines in recent times and for Flybe to determine a 1p bid is ‘fair and reasonable’ it must have been in pretty dire financial circumstances.

“References by management to pressure on short-term financial performance and legacy issues adversely affecting cash flow suggests it was close to running out of cash.

“Stobart, which pulled out of an earlier approach for Flybe just under a year ago, clearly sees value in the franchise which will operate under the Virgin Atlantic brand.”

These articles are for information purposes only and are not a personal recommendation or advice.

The daily market update is written by Russ Mould, AJ Bell’s Investment Director and his team. The article highlights the movement in the main index, winners and losers on the day and any macro-economic announcements.