Shares in electrical retailer AO World (AO.) dropped over 6% to 392.5p despite a strong half-year performance, as investors seemingly rushed to lock in gains.

The firm has been a clear lockdown winner, and in the six months to 30 September reported that pre-tax profit rose to £18.3 million, compared to a loss of £5.9 million in the same period a year ago, as revenue jumped 53.2% to £717 million.

Product revenue, comprising sales generated from ao.com, marketplaces and third-party websites, increased significantly to £505.3 million, with sales generated from ao.com increasing by 69%.

PROFIT PROMISES

For years, AO has insisted it was on a path to profit and that strong levels of revenue growth would eventually tip the business into positive earnings, but for most of that time the market had cast doubt over its ability to hit the profit goal, saying it was a highly competitive industry and AO’s German operations were holding the business back.

But investors have radically changed their tune on AO this year, with its shares up over 360% year-to-date as the firm proves its profitability, while its German arm is forecast to be profitable by 2022.

AO has also started the second half of its financial year strongly, with the early weeks of the third quarter seeing growth accelerate from the first half run-rate (+54%), and Jefferies analyst Andrew Wade thinks earnings upgrades could be on the way for the retailer.

He said if AO’s second half UK revenue growth is at least consistent with the first half, this would suggest full-year UK revenue of around £1.4 billion, 7% ahead of Jefferies’ estimate, and £5 million above the £68 million forecast for full year earnings.

‘AO IN PURPLE PATCH WHICH MAY FADE AWAY’

AJ Bell investment director Russ Mould said lockdown measures have been a major catalyst for AO, having seen a significant jump in demand for electrical goods and providing the firm with the opportunity ‘to show the benefits of good customer service and competitive pricing.’

But he added, ‘There is still a nagging feeling that AO is in a purple patch which may fade away once society returns to normal assuming widespread Covid vaccinations.

‘AO has been one of the biggest lockdown beneficiaries, but what happens when those restrictions ease and more people spend less time at home?

‘A key sales tailwind could disappear, meaning AO will have to work hard to keep the customers it won during lockdown by encouraging them to buy other goods, as well as find ways to recruit more customers. That won’t be easy.’

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Issue Date: 24 Nov 2020