Asos (ASOS) has become a top pick for Barclays as the online fashion retailer is set for a strong year.
Barclays analyst Christodoulos Chaviaras retained his ‘overweight’ recommendation ad target price of £45.00 on the shares, which rose 2% to £32.00 yesterday
‘We replace Dixons Carphone with Asos as our top pick,’ he said. ‘Positive feedback from last week’s fashion preview for spring/summer 2016, strong current trading and a solid outlook into full year 2016 reassures us that Asos has started the year on a strong note.
‘Our recent trips to Europe and the US reveal improved investor sentiment, which could get better into year-end as Asos is well prepared ahead of peak season with new collections and faces easy comparisons in the first quarter. Our analysis shows that the sales growth guidance of c.20% in full-year 2016 is a good starting point and higher growth can be achieved. Asos can resume double digit earnings growth in full year 2016.’
<b><i>Final results were broadly in line with our and market expectations. Pre-tax profits in the year to end of August rose by 1% to £47.5m vs. CFE Research £48.0m (Company consensus: £47.2m). Gross margins were reported to be up by 20bps to 49.9% (CFE Research -8bps) recovering strongly in the second half as a result of a strong full price sales mix in this period. Gross margins, however, declined by 230bps in Europe to counter adverse currency exchange movements. Costs were up by 21% impacted by higher payroll and warehousing charges offset by lower marketing. Net cash was much stronger than our forecast at £119.2m benefiting from working capital gains. The current year has started well and the company are guiding toward sales being up by 20%, gross margins being down by 50bps and operating margins being in line with the previous year at broadly 4.1%, which implies earnings growth of c.20%. Following this update, we are retaining our FY2016 pre-tax profit forecast of £58.0m (EPS: 53.7p). The stock, which has declined from a high of £42, has started to recover from September’s low of £25. The company is now of a meaningful size with sales forecast at over £1.3bn in FY2016, has relatively strong cashflow and a ‘state of the art’ logistics infrastructure. Earnings, however, have declined over the last two years and although they are set to improve in the current year, the improvement in momentum, we believe, is priced into the stock. The departure of Nick Robertson as Chief Executive, who was the ‘guiding light’ of the business, is an added concern. The stock remains highly valued at 54.5x our FY2016 fully diluted earnings forecasts. We are reinstating our recommendation as HOLD from Under Review and our TP at 3000p from Under Review.</b></i>
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