Shares in online fashion retailer ASOS (ASC:AIM) rallied 39% to £21.68 on Wednesday on refinancing-driven relief and better-than-expected half year results issued after yesterday’s market close, which showed continued sales momentum and a payoff from operational improvements in the business.
However, the encouraging numbers were largely overshadowed by a £247m placing and debt refinancing to bolster the balance sheet and allow ASOS to weather the coronavirus driven storm. In a note to clients urging them to sell the stock, broker Liberum Capital warned the equity raise ‘may not be enough’ and cautioned ASOS ‘could remain at elevated debt levels for some time’.
HALF YEAR PROGRESS
Results for the six months to 29 February showed sales up 21% to £1.6bn, ahead of the 18% growth called for by consensus. Pre-tax profits recovered from £4m to reach a record half-year haul of £30.1m amid strong trading and cost reduction progress.
UK sales grew by 20% year-on-year to £577m, the international segment saw retail sales grow 22% to £974m, although ASOS’ retail gross margin fell 200 basis points to 45.4%. This margin squeeze reflected US duty and investment in promotions to drive the top line amid competitive market conditions.
REFINANCING OVERSHADOWS RESULTS
Yet the big news today is ASOS’ equity raise and debt refinancing to further secure the balance sheet and ensure it can emerge from the coronavirus pandemic in a strong position.
Consumer demand has been significantly impacted since containment measures were introduced around the world, with group sales down roughly 20-25% over the last three weeks.
ASOS has placed 15.8m new shares, raising gross proceeds of £247m, at a slight premium to Tuesday’s closing price. It is also finalising discussions to secure a £60m-to-£80m 12-month extension to its £350m revolving credit facility to ensure additional operating flexibility through the crisis, and has outlined an agreement with lenders to adjust the net debt to EBITDA covenant test for the next 12 months.
In addition, the web-based clothing and accessories purveyor has kick-started the process to seek access to the Covid Corporate Financing Facility launched by the Bank of England.
WHY LIBERUM IS BEARISH
The worrying news is that based on Liberum Capital’s analysis, ‘this raise may not be enough and while the company state they will reduce their Autum/Winter buy, they as usual leave the all-important information of how much out’, commented the broker.
Liberum also flagged ASOS’ current net debt of £164m versus its previous expectation of £90m, ‘highlighting how quickly working capital unwinds at ASOS. We estimate the buy could be down by at least 25% meaning the group could remain at elevated debt levels for some time, limiting equity recovery for at least 12 months.’
Putting its price target and forecasts under review, Liberum warned: ‘The raise does not seem enough, current disclosure remains poor at a time when more information should be provided and risks loom large in fast fashion as clearance activity post lockdown could be very fierce in this segment of the market, limiting cash generation further.’
Shore Capital has a ‘hold’ rating on ASOS, arguing ‘the equity raise of £247m and debt refinancing means that the company now has a balance sheet and significant liquidity to weather the current storm and exit the current trading environment from a position where it can continue to invest to chase its global ambition.’
