Interactive Investor

Why ASOS shares just surged 12%

13th January 2022 13:33

Graeme Evans from interactive investor

There’s some big news driving demand for ASOS shares today, but two other household names are also in the spotlight.

The FTSE 250 index is to be the new home for ASOS (LSE:ASC) after the fashion retailer today called time on its AIM listing, two decades after joining the junior market worth £12.3 million.

ASOS, or AsSeenonScreen Holdings as it was known at the time of a 20p-a-share placing back in October 2001, is now worth about £2.5 billion having surged 11% in value today.

The rise of 230p to 2,489p followed a reassuring Christmas trading update as ASOS attempts to rebuild investor confidence after last year's profit warning, when supply chain problems and high levels of returns hit its performance.

Better-than-expected activity in the UK means sales growth guidance for the year to 31 August is unchanged at between 10% and 15%. It is also sticking by hopes for adjusted profits of £110 million to £140 million as supply chain bottlenecks ease and its stock profile normalises.

Chief operating officer Mat Dunn recently set out plans to grow revenues from last year's £3.9 billion to £7 billion, representing an annual growth rate of 15-20% and supported by own-brand offerings and a drive to double the size of sales in the US and Europe.

This expansion will now take place under the eyes of the main market after the announcement that ASOS plans to leave AIM in February.

Dunn said: “Our listing on AIM for the past 20 years has been an important part of ASOS' development, but the time is now right to move to the main market as we focus on delivering our medium-term guidance and longer-term growth ambitions."

ASOS will be eligible for the FTSE 250 index, although at one point in March 2018 its valuation was more in keeping with the FTSE 100 index as shares topped 7,000p.

They fell back towards 2,200p later that year and were just over 1,000p at the onset of the pandemic, only to surge back to above 5,500p last April.

Investors expecting another upward leg in the ASOS roller-coaster ride may be disappointed, however. Broker Liberum cut its price target today and said there is still significant work to do if ASOS is to meet its 2022 objectives.

It noted that sales in Europe and the US were impacted by Covid-19 and supply chain disruptions and said that gross margin declined by 400 basis points to 43%.

Analyst Wayne Brown added: “While ASOS has made significant technological and infrastructure progress over the last few years, significant cash has been burnt to achieve this and execution has been a source of disappointment historically.”

The shares trade on 20 times earnings, which he said looked to be appropriate for the growth and margin that ASOS currently offers. Brown has a “hold” recommendation, having reduced his price target from 3,560p to 2,300p.

UBS is slightly more optimistic at 3,040p, but said that it had expected aggressive promotional campaigns over Black Friday to have driven more volume in today's update.

In other retail statements, Halfords (LSE:HFD) stuck by full-year guidance today despite a challenging Christmas period when the Omicron variant hit footfall and supply chain disruption impacted the availability of children's bikes.

An “exceptional” performance in Autocentres and a 5.6% rise in retail like-for-like sales on 2020 levels means the chain continues to expect full-year profits of between £80 million and £90 million for the year ending 1 April.

Peel Hunt said this demonstrated the company's new-found resilience: “The shape of Halfords has now changed and its ability to take knocks on the chin is much greater.

“Clearly the issues it had to face up to in December were not of its making, and maybe there is a little less wriggle room in forecasts than there was but we will not be changing numbers today.”

Shares trade on 11 times forecast earnings but the broker thinks a mid-teens figure is fair value as the business continues to evolve under chief executive Graham Stapleton. Peel Hunt's price target is 525p, compared with 364p today.

Card Factory (LSE:CARD) shares fell 16% as it warned that price increases and efficiency savings may not be sufficient to offset the margin pressure caused by higher freight, staff and energy costs.

These headwinds will mean lower future profits than previously anticipated, although this year's financial performance is ahead of expectations on the back of store sales returning to near to Christmas 2019 levels.

Shares fell 10.5p to 52.97p but Liberum called the City's reaction “harsh” and said Card Factory should be trading at 110p.

The broker added: “Over the medium to long-term we see material upside, as the balance sheet improves further and profit recovers, driven by improvements to the store offer, online growth and more capital-light retail partnerships.”

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