Pure play online electrical retailer AO World (AO.) cheapens 3.7% to 130p on the news first half sales growth slowed amid challenging MDA (Major Domestic Appliances) markets in the UK and Germany and reveals its full year performance will be ‘more second half weighted than previously anticipated’, potentially softening investors up for another profit warning.

The unscheduled trading update is bundled together with the bolt-on acquisition of Mobile Phones Direct (MPD) for £38.1m, an interesting-looking deal increasing the scale and sophistication of AO’s mobile proposition.

SLOWER GROWTH

The good news is Bolton-headquartered AO World is delivering against its purpose to ‘have the happiest customers by relentlessly striving for a better way’. The bad news is first half growth at the group level slowed to 9.9%.

UK sales growth slowed to 5.7% in the six months to 30 September in what the company calls ‘a declining MDA market’. At the same time international growth, the exciting bit of the AO World investment case, slowed to 35%, reflecting not only a testing MDA market in Germany but also ‘a change in the driver operating model’ which meant that ‘delivery capacities were limited to some extent through August and September’ in Europe’s biggest economy.

THE DREADED ‘SECOND HALF WEIGHTING’

Despite the weak backdrop, the washing machines, computers and televisions seller sounds confident enough about the all-important Christmas period, although it does drop in the dreaded ‘second half weighting’ caveat. Seasoned investors have come to fear the phrase, often the precursor to a profit warning.

‘Customer satisfaction levels remain exceptional and an increase in brand awareness resulting from the new brand campaign is encouraging’, insists AO World. ‘Consequently, the board believes full year results will fall within the range of its expectations, albeit more second half weighted than previously anticipated.’

DIALLING IN A NEW DEAL

AO World is also entering a large market, adjacent to its core electricals business, through the acquisition of Mobile Phones Direct for a total consideration of £38.1m, to be funded with £20.9m in cash and 13.1m AO shares and valuing MPD on a reasonable enterprise value to earnings (EV/EBITDA) multiple of 5.9 times.

Based a stone’s throw from Reading, MPD is an online only mobile phones purveyor operating through two online brands, Mobile Phones Direct and Smart Phone Company. Growing fairly rapidly and generating cash, MPD generated revenues of £121.7m and EBITDA of £5.5m in the year ended 31 March 2018.

AO World is talking up the target’s large customer base and strategic relationships with key mobile network operators and mobile phone distributors in the UK and insists the acquisition will enhance earnings in the first full year following completion.

‘This deal represents a significant step forward in our strategy of developing our growing range of online electricals and adding new complementary categories that customers want and expect from AO,’ comments CEO Steve Caunce.

‘Mobile Phones Direct already has a leading position within the UK online mobile phone market and is a business which is highly complementary to AO. In coming together, AO will achieve instant scale and be well-placed for future opportunities within a highly attractive and growing UK mobile phone market.

‘With 5G services expected to launch over the next two years and as the electrical products we sell become more connected than ever before, moving further into the mobile market is a logical next step for us.'

Yet Shore Capital remains negative on AO World, commenting: ‘On the one hand this small acquisition scales up the company in a complimentary category but also complicates the group further. The AO World investment thesis was to shakeup the MDA market and clearly the UK and German electrical markets remain challenging.'

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Issue Date: 09 Nov 2018