ASOS-Established in 2000 as an affordable, celebrity-inspired, fast fashion retailer,
ASOS (or .as seen on screen. as it was originally) has since become a major
force in the world of fashion and beauty retailing. By 2003, ASOS had become
the fifth most frequently visited clothing website in the UK (according to
Hitwise), and since then has advanced to become the second most-visited
clothing site, ahead of Top Shop and behind only Next. In November, the
number of unique visitors to its website (ASOS.com) increased to over 1.4m,
equivalent to a year-on-year increase of 46%.
Investec Note January 13th 2006
Summary and valuation
ASOS appears to be jinxed, with problems having occurred in two consecutive
years at its warehouse. This year though, the problems were clearly more
serious, as the Hemel Hempstead explosions in December almost destroyed
its warehouse, and it was forced to stop trading altogether during in the runup
to Christmas. We write this note as ASOS remains out of action.
However, ASOS should be back online around 16 January (today), and we
expect it to raise awareness around the website re-launch with some highprofile
advertising and promotions. These could potentially be funded within
its insurance provision.
Furthermore, we believe ASOS has bright prospects as (1) high-speed
broadband internet access increases across the UK, and as (2) it leverages the
investment it has made in key personnel and infrastructure during 2005. ASOS
should be able to bring together the best of .bricks & mortar. and .clicks.
strategies . i.e. high gross margins but the low-cost structure of a dot com.
We have initiated coverage with estimates some 30% above consensus and
believe that, as it increasingly delivers economies of scale at the centre, EBIT
could increase towards £12m within the next 3-4 years, double the amount
currently built into our forecasts.
ASOS is cash positive and cash generative, meaning that is has the flexibility to
reinvest in new growth opportunities should they arise or, alternatively, return
cash to shareholders either through ordinary dividends or special dividends.
Return on assets employed of 100% this year (ex-cash) should rise thereafter.
Based upon our forecasts, the stock would trade on a PER of only 15.5x next
year, dropping to 12.6x in 07/08. Should ASOS increase PBT towards the level
scoped out in this note, we believe it could be valued at up to £100m and have
accumulated net cash of over £10m on the balance sheet. Against a current
valuation of just over £50m this would indicate the potential for new investors
to generate a return on investment of up to 100% within a 3-4 year timeframe.
Against a backdrop where fast-fashion has become a prerequisite for success
on the high street, it is also feasible that a number of pure bricks & mortar
operators could see ASOS as a suitable acquisition target . to develop both its
internet capability and its fashion credentials simultaneously. Given our belief
that 2006/07 will be the year that ASOS begins to demonstrate its profit
capability, any potential take-over attempts are likely to occur in 2006.
Key risks to the business include dependency on a single warehouse, technical
failure online and increased online competition from larger high street fashion
rivals. We believe any legal risks in relation to passing off are relatively small.
We initiate coverage with a BUY recommendation.