ASOS PLC (LSE:ASC) copped a rare upgrade from the City when Shore Capital Markets ditched its sell rating for a hold rating on the online fashion retailer.
While Shore Cap analysts highlighted the group’s improved debt position following the disposal of its Topshop and Topman brands, the upgrade was also a reaction ASOS’ declining market valuation.
“Since our note at the start of September, ASOS’ share price has fallen over 20%,” said Shore Cap. “A combination of this correction, along with the recent debt actions, which provides near-term liquidity, leaves us more comfortable with the current valuation.”
Put simply, ASOS is now cheap enough to hold off any further capitulation, for now.
There are plenty of headwinds to consider, Shore Cap pointed out, not least the ever-encroaching competition from Chinese e-commerce rivals.
“We continue to believe the online fashion industry is facing tough competition from the likes of Shein and Temu,” said analysts. “Fast fashion brands are reacting quickly to consumer trends, and at a low price point.
“Furthermore, we also see market share pressures from the rise of re-selling clothes, the likes of Vinted come to mind, as well as omnichannel strategies highlighting the robustness of the high street, e.g Next.”
Shore Cap doesn’t see these headwinds blowing any time soon, though the broker contended that “ASOS has fared better than the likes of Boohoo over the past few months”.
ASOS’ enterprise value to EBITDA (EV/EBITDA) multiple is currently around 10 times, which, though cheaper than the sector average of 12 times, though appropriate given “its low-single-digit margin and top-line pressures”.