ASOS (LSE:ASC) shares have fallen over 40% since September 2022. As disappointing as this might be for existing shareholders in the online fashion retailer, there’s potentially some good news.
Frasers Group sees this as a buying opportunity and has built up a 19.3% stake in the company. It first revealed a 5% shareholding in October 2022. In August 2023, it was particularly active, having started the month owning 15.1% of ASOS.
But Frasers has never commented publicly on the reasons why it’s so keen on buying the stock. According to a report in The Telegraph in May 2023, its offer of a stronger trading relationship in return for an additional 5% stake was turned down.
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Bid talk
Some investors are getting excited and think a takeover might be on the horizon.
But two other shareholders — Danish retail billionaire Anders Holch Povlsen and Camelot Capital Partners — own 41% of the company and will have a major influence over the future ownership of the group.
And not everyone is as keen on ASOS as Frasers.
According to the Financial Conduct Authority, it’s the most shorted stock on the London Stock Exchange. Seven firms have borrowed 5.35% of the company’s shares in the hope that they will fall in value.
But its most recent trading statement, covering the three months to 31 May 2023, reported a return to profitability.
Although revenue was down 14% on the same period in 2022, profit per order was 30% higher. The company is managing its inventory better and is placing more of an emphasis on earnings than sales.
Expert opinion
The 23 analysts covering the stock appear to be in agreement that the company has turned the corner.
All are expecting positive earnings before interest and tax (EBIT) in 2024 and 2025.
| Forecast EBIT (£m) | 2023 | 2024 | 2025 |
| Consensus | (24) | 60 | 89 |
| Minimum | (43) | 30 | 57 |
| Maximum | (14) | 105 | 129 |
Frasers has a price-to-earnings ratio of 11. Applying this to the consensus forecast for 2024 would imply a market cap for ASOS of £660m. That’s a 37% upside to its current stock market valuation.
Using the same methodology for 2025, gives a figure of £979m.
Verdict
Of course these analysts may be wrong and there’s a big range in their forecasts.
ASOS says its mission is “to become the world’s number one destination for fashion-loving 20-somethings“. With an estimated 1.2bn of them on the planet, that’s a big potential market.
And over 75m people visited its website in July 2023.
But the company has never paid a dividend. And it’s disappointing to learn that one of the co-founders recently sold £1m of shares. It always makes me nervous when an insider offloads a large amount of stock.
However, I agree with Mike Ashley. I think ASOS shares currently offer good value. If I had some spare cash I’d buy the stock.
