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Online electrical retailer should deliver some festive cheer
Thursday 15 Dec 2016 Author: James Crux

Open a position in AO World (AO.) ahead of January’s third quarter trading statement, where the online electrical retailer should report strong growth metrics following a bumper Black Friday and broader festive period.

Shares believes shoppers will have splurged on washing machines, televisions and computers ahead of well-flagged 2017 price hikes, filling the £774.7m cap’s pre-Christmas coffers and sparking renewed interest in a bona fide growth stock.

Plug-in and play

Shares has previously adopted a sceptical stance on AO World due to its frothy valuation and fierce competition from Amazon (AMZN:NDQ), John Lewis, Dixons Carphone (DC.) and others. Furthermore, the company lost £6.7m at the pre-tax line in the year to March and is still investing heavily to capture an immense growth opportunity in Europe.

Yet we have always acknowledged the Bolton-based retailer’s compelling investment thesis; it is primed to increase market share in the electricals market as online penetration grows. This effort is supported by keen prices, a huge range and ‘dedication to amazing service’. The leading major domestic appliance retailer has also expanded successfully into small domestic appliances, TVs and the computing category, with improved search engine optimisation raising brand awareness.

Power, colorful outlet with electric plug on blue wall

Tactical trade

On a tactical basis, we’re turning positive. For now, investors should ignore negative earnings per share since strong UK profitability is being used to fund loss-making expansion in Germany and the Netherlands.

Half year results (22 Nov) revealed 23% top line growth to £324.7m, with UK AO website sales up 21% to £259.4m and Europe revenue rising 67% to £29.6m. Reflecting rising brand awareness and AO’s increased buying power, gross margins improved and UK adjusted EBITDA grew 154.5% to £13.1m.

Great Ideas - AO WORLD - DEC 16

This high-growth, profitable UK core lends some underpinning to the toppy overall market tag. Meanwhile the European business is expected to break into profitability in 2020 on €250m sales and should swell AO World’s market value over time.

Stocking filler

We believe the opportunity to trade the stock ahead of January’s Q3 update is compelling. Management has talked of ‘unprecedented’ price increases in electricals due to supplier price increases following the EU referendum, which may impact fourth quarter volumes. Yet panic buying by consumers keen to lock-in deals ahead of sterling-driven price hikes may have resulted in an outstanding third quarter including Christmas, confirmation of which may spark upwards momentum in the share price.

AO World (AO.) 184.5p

Stop loss: 147.6p

Market value: £774.7m

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