Retailers ASOS (LSE: ASC), AO World (LSE: AO) and Primark — which is owned by Associated British Foods (LSE: ABF) — are all expanding aggressively in international markets. Does the potential for high growth abroad make these three companies A-star investments?
ASOS
ASOS has been one of the AIM market’s great success stories. When the online “fast fashion” firm listed on London’s junior bourse in 2001, the business was valued at £12m. Today, the company has a market capitalisation of £2.7bn.
ASOS’s international expansion has seen it develop nine local language websites, and open warehouses in the US, Europe and China. The company’s web and social media hub is an ever-expanding “community” of loyal, passion-for-fashion customers.
ASOS’s shares clearly got ahead of themselves early last year, when they reached a high of over 7,000p. During the course of the year revenue and profit growth in the international business had a bit of a stumble. Capital expenditure on expansion was higher than previously guided, and there were problems with pricing and foreign exchange rate movements.
When I looked at ASOS in June, the share price was 2,750p, and I thought a valuation of 2.3x forecast 2014 sales and 64x earnings wasn’t outrageous for a top-notch business going through some growing pains. At today’s price of 3,236p, the sales and earnings multiples are 2.8x and 73x, respectively; so, the valuation’s a bit less attractive now.
AO World
Online white goods retailer AO World was floated on AIM just over a year ago, with plans to expand into Europe. The company has recently set up in Germany, and the infrastructure it has built can also be used to service Belgium and the Netherlands.
I rate AO World a lower-quality business than ASOS. The domestic appliances market is intensely competitive, so margins are low; and while ASOS has built a community of “sticky” customers, people just aren’t as passionate about dishwashers and fridges.
I took a close look at AO World’s valuation in December when the shares were trading at 250p. I concluded that an EV/EBITDA of 67x was way too high. Last week, the company issued a profit warning (due to performance in the UK, rather than in Germany). The shares crashed, and are currently changing hands at 180p.
I used trailing 12-month EBITDA of £15.1m in my December valuation, but I’m now going to use the company’s guidance of £16.5m for the year ending 31 March. The fall in the market value of the company and the higher EBITDA give an EV/EBITDA of 45x. That still looks pricey to me, given, as I mentioned earlier, the nature of the industry in which AO World operates.
Associated British Foods
Primark is the jewel in the crown of Associated British Foods (ABF). The affordable fashion phenomenon is responsible for 60% of group operating profit, the remainder coming from ABF’s four other divisions (grocery, sugar, ingredients and agriculture).
Primark continues to grow in the UK, but is growing even faster abroad. The company’s “highly successful” entry into France during 2014 brought the number of countries in which the business operates to nine. In 2015, the first Primark stores will open in the north-east of the US.
I’ve long been an admirer of ABF. This £25bn conglomerate typically looks expensive on conventional earnings metrics, but Primark has a proven, successful format, and what analysts call a long “growth runway”. International expansion can drive double-digit growth for the next 20 years.
At a current share price of 3,125p, ABF trades on 30x forecast earnings for the year ending September 2015. The valuation is a little higher than the company’s usual premium rating, so there may be an opportunity to buy at a lower price than the current level.
