Better value elsewhere says Liberium24 Jan 2023 07:24
Boohoo’s share price and valuation metrics could entice a would-be investor into purchasing shares, but a deeper look suggests it could be a value trap according to broker Liberum.
A value trap is a stock that appears to be cheaply priced based on fundamental metrics, such as an enterprise value/sales (EV/sales) ratio, and the market price compared to historical highs, making the stock appear discounted.
A higher EV/sales ratio means the stock appears to be more expensive and vice versa.
According to analysts at Liberum, the “shares appear cheap” at 0.35 times EV/sales 12 months forward.
This is in comparison to an EV/sales ratio of 2.5 times before the pandemic.
Analysts at the investment bank also note that shares seem cheap on an EV/EBITDA ratio of 8 times.
However, according to Liberum, “there is better value elsewhere for now.”
Specifically, the broker notes its own forecasts of “negative free cash flow until 2025, debt on its balance sheet, diminished prospects in key markets and a lack of visibility on the scalability of its newer brands,” as reasons behind the value appearing distorted.
Earlier today, Boohoo said it expected rising costs to moderate in the current year after posting an 11% decline in group revenue for the four months to 31 December 2022.
The company said its performance for the full-year ending 28 February 2023 is expected to be in line with expectations, with an adjusted EBITDA margin of 3.5%, which is at the lower end of previous guidance between 3% and 5%.
“The poor results reflect the tough comparative from the prior year, ongoing challenges faced by online retail brands, with high-cost inflation and weaker consumer demand having an impact on the very fabric of the online fashion industry,” said Russel Pointon, at Edison Group.
“The drop in revenue experienced by Boohoo exemplifies a broader pattern of decline that saw online fashion firm Missguided fall into administration in May 2022.”
Sign In
Follow the stocks
