ASOS PLC (LSE:ASC) may need to consider an equity raise due to overly ambitious profitability targets, according to a research note from Liberum.
The boutique investment bank highlighted the fact the fast fashion retailer's £400 million profitability improvement strategy relies heavily on gross margin gains driven by an increased full-price mix and efficiency improvements in distribution.
However, Liberum remains sceptical about the company's ability to achieve these targets amidst a worsening consumer proposition and increasing competition.
ASOS will need at least a 500 basis point gross margin uplift to deliver on its targets, which may be difficult to achieve in the current environment, the note suggests
Although a discounted cash flow (DCF) derived target price of 874p would be fair if ASOS meets its goals, the company's return on capital employed (ROCE) is structurally low, suggesting a fair value at 528p.
If the targets are met, however, ASOS could generate a 17-19% free cash flow (FCF) yield in FY 2024E based on its current market capitalisation.
"On the downside, the key risk is that ASOS’s full price stance could backfire, and the group may need to raise equity at a material discount," the Liberum note said.
However, the bank maintained a "sell" rating, with a target price of 700p (up from 500p).
The shares, up 37% in the year to date, were off 19.2p at 730p late into Tuesday's session.