AO World´s short-term multiples are astronomical, Shore Capital says

AO World´s shares will likely come under pressure amid an "erratic" retail environment thus far in the third quarter and after the company posted larger than expected losses per share for the first six months of its financial year, Shore Capital said in a research note sent to clients.

However, analyst George Mensah retained his 'buy' recommendation on the belief that management will "deliver on its strategy and will become sufficiently profitable with scale".

The on-line electrical retailer´s loss per share for the six months to 30 September was 1.58p, versus the -0.99p penciled in by Mensah, as it continued to invest to become the largest retailer in the space.

Top line growth on the other hand was as anticipated, with sales rising 21.7% to £264.3m (Shore Cap Forecast: £264.4m).

Regarding the company´s aim to extend its reach into Holland, with trading due to commence in Spring 2016, around the start of its fiscal year 2017, the analyst pointed out that it represented a €3.2bn opportunity for the retailer.

The European business delivered a gross loss of £2.2m during the reference period.

Investment in customer acquistion pressured its EBITDA margin to 2.1%.

However, "this investment in marketing we believe is necessary, with brand awareness still weak relative to AO’s market share position," the broker said.

Nevertheless, he added that "short-term multiples remain astronomical."

According to Mensah´s calculations, the company´s current EV/EBITDA for the full-year stood at abvout 134, falling to 65 times in fiscal year.