RBC Capital reiterates 'top pick' on ASOS, says margin fears unfounded
RBC Capital Markets reiterated its 'top pick' stance on online fashion retailer ASOS on Thursday, saying the shares should re-rate as fears prove unfounded.
ASOS
350.80p
11:49 19/04/24
FTSE AIM 100
3,568.81
11:55 19/04/24
FTSE AIM 50
3,904.11
11:55 19/04/24
FTSE AIM All-Share
741.35
11:55 19/04/24
General Retailers
3,840.08
11:54 19/04/24
RBC said it sees ASOS as a high quality compounder, trading at a more attractive valuation compared to history, creating a compelling entry point.
"Our confidence in ASOS' ability to sustain growth is based on its large market opportunity, defendable competitive moats and strong execution. Sales growth should accelerate in P4 and FY earnings expectations met, which should reassure the market and support the shares."
The bank argued that increasing concerns about margin sustainability are unfounded. It noted that short interest in the stock has increased in the last three months and now stands at around 10% versus 3.5% previously.
RBC said margins are sustainable as the company continues to benefit from operating leverage, greater buying power and increasingly automated warehouses driving efficiencies.
"Meanwhile, we are confident that ASOS can sustain revenue growth as it delivers an ever-improving proposition, particularly in its large international markets," it said.
It expects management to reiterate FY19 guidance at the full-year results on 17 October, for revenue growth at 20-25% and earnings before interest and taxes margin around 4%, alleviating market concerns.
RBC, which has a 7,700p price target on ASOS, expects 2018 pre-tax profit of £100m, in line with consensus, EBIT margin of 4.1% and gross margin to be up 110 basis points year-on-year, in line with guidance.
At 1520 BST, the shares were up 3.2% to 6,090p.