AO here we go, either a little too high or a little too low | FT Alphaville

AO here we go, either a little too high or a little too low

The UK online white goods retail sensation,, is the latest hot stock market floatation. Early trading puts its valuation in the region of £1.6bn, so we thought we better try and work out what exactly it does. After all, no one would pay six times sales for a washing machine shop, would they?

From the about us section:

We operate a sleek and well-refined process via our three strands. With over 4.5 million customers, we live and breathe excellence from the very first phone call, to the moment we power up a customer’s brand new appliance in their own home.

Not delivering your brand new appliance to someone else’s home is a start, we guess. But about those strands, the notice of intention to float provides a bit more clarity:

In 2012, AO had a 24 per cent share of the online market for major domestic appliances in the United Kingdom, of which 19 per cent represented AO website sales, and 5 per cent represented third-party branded website sales according to the OC&C Report.

Ah, that looks like two of the strands. It sells washing machines online through its own website and it provides the appliances for other sites run by the likes of Boots and Next. Very 21st century.

Their share of appliance sales is pretty impressive though, almost a quarter of the market. Who commissioned the O&C report, by the way?

Oh, AO did. Fancy that.

Maybe we should compare its figures to someone else’s. As it happens, a forthright presentation from Dixons, the UK’s largest appliance retailer, has been circulating this month, claiming a 28 per cent share of all Major Domestic Appliances (MDAs) in the UK & Ireland (click to enlarge):

While the fastest growing online retailer of domestic appliances is… Dixons!

Which must be why Dixons is valued at an astronomical, er, 0.26 times sales. Of course, those are Dixon’s own estimates, so maybe the market doesn’t believe it when it says it is cheaper and better known that AO.

Or maybe it’s the profits. We had a look at the announcement of intention to float, and while there isn’t a profit and loss statement (never mind a balance sheet or indication of cashflow), there are a few select, unaudited, financial highlights.

Lets ignore the 2012 numbers, because as the notes make clear there were some exceptional costs. This is a fast growing company and we are interested in the growth, not the costs involved in adjusting to that growth.

For the year ended 31 March 2012, the Group had exceptional costs totalling £2.8 million, including £1.4 million included in cost of sales and £1.3 million included in administrative expenses, relating to specifically identifiable costs of the relocation of the Group’s delivery and logistics services from Radcliffe to the national distribution centre in Crewe, the opening of a customer service call centre in Manchester and the restructuring of the Group’s delivery fleet, including the write off of onerous property and vehicle leases, the write off of fixed assets no longer required, redundancy costs and dual running costs

Hmm, earnings before interest, tax, depreciation and amortisation look like they actually declined in the first nine months of the current financial year, versus the same period in 2012, from £7.9m to £6.7m, but if you add back £1.4m of listing costs they are up slightly to £8.1m. That is just £200,000 additional profit from the £84.3m increase in sales, but who is going to put a price on growth?

Actually, that is sort of the point of the exercise. Lets take the most generous comparison we can, ignoring the troublesome 2012:

The Group’s profit for the year attributable to equity shareholders increased from £2.6 million for the year ended 31 March 2011 to £6.8 million for the year ended 31 March 2013, a compound annual growth rate of 60.4 per cent.

At what looks to be a market capitalisation at pixel time in the region of £1.6bn,(only slightly less than Dixon’s £1.9bn) that would be a trailing price earnings multiple of about 235.

But lets assume AO continues to grow profits at 60 per cent a year. By the year to March 2018 it would earn £71m, which would mean it is only worth about 22 times 2018 profits.

Of course, the company needed £275m in sales to produce £6.8m in profit last year. Assuming that the fall in margins this year is also an aberration (maybe it’s an even numbered year thing), £71m would imply 2018 sales of £2.9bn. Which going back to the Dixon’s estimate above, is 90 per cent of the current £3.2bn market (online and traditional) for major domestic appliances in the UK and Ireland.

Yep, we are definitely missing something. Ah here it is, doesn’t just sell washing machines, it also has a blog

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Uh-oh, AO – FT Long Short