ASOS plc (LON:ASC) shares clawed back gains on Tuesday as analysts at Credit Suisse and Barclays recommended investors take advantage of the online fashion retailer’s cheaper valuation after its shock profit warning.
The company lost about 40% of its value on Monday after it cut its full-year guidance, blaming economic uncertainty and weaker consumer confidence.
ASOS said it had seen a “significant deterioration” in trading in November – a key month for the group – while increased discounting and unseasonably warm weather over the past three months reduced its average selling price.
ASOS still a long-term winner, says Credit Suisse
Credit Suisse raised its rating to ‘outperform’ from ‘neutral’ but cut its target price to 3,500p from 6,000p, saying it thinks ASOS is “still a long-term winner”.
“Following yesterday’s profit warning, the shares have now fallen 66% from the year’s high and the while near term sales and margins are unpredictable, the key considerations are does it have a business model with medium-term potential to grow and generate cash?"
“We believe this is the case and, at the risk of catching a falling knife, upgrade Asos to ‘outperform’ for the first time with a 12m forward target price of 3,500p (vs 6,000p).”
The broker said it sees scope for ASOS to cut costs to offset its weaker sales performance. With a new chairman and chief financial officer on board, Credit Suisse reckons there could be an opportunity to take at least 1-2% out of operating expenditure.
ASOS appointed former ITV and Royal Mail boss Adam Crozier as its chairman to replace Brian McBride in November, while former Britvic finance chief Mathew Dunn will begin as chief financial officer next spring.
Barclays expects ASOS to recover in 2020
Barclays kept an ‘overweight’ rating on the stock but reduced its target price to 4,000p from 7,500p, saying it continues to believe the company’s business model is differentiated and the numbers will improve in the long term.
“Our discounted cash flow no longer assumes a return to 20-25% top line and has a 5% EBIT margin in the mid 2030s. Yet it has more than 50% upside,” the bank said.
The bank said current trading at ASOS was much worse than thought and the profit warning had “caught us out”.
Barclays said most of the company’s issues were due to a tough UK retail market but less so in Germany and France where ASOS said trading conditions have become more challenging.
“On top, ASOS has got the Black Friday strategy ‘wrong’ so there is some execution at play,” the bank said.
“E-commerce is becoming less immune to wider retail pain as it grows, and that is a concern. But it isn’t structurally thesis-changing - ASOS remains a long term winner in our view.”
Barclays cut earnings per share forecast for fiscal year 2019 by 61% to 27p and expects a modest recovery in 2020 to 91p, although that marks a 38% reduction to its previous estimate.
UBS and ShoreCap put recommendation under review, Liberum downgrades rating
UBS and Shore Capital placed their rating and target price under review following the profit warning.
Liberum turned more cautious, downgrading its recommendation to ‘hold’ from ‘buy’ and lowering its target price to 2,800p from 8,000p.
“We lower our 2019 EPS forecast by 54%, with a flow through to outer years due to (i) lower sales growth, (ii) lower retail gross margins, and (iii) a halving of 2019EBIT margin from 4% to 2%,” it said.
The broker added: “There is still significant value in ASOS’s existing customer base, which suggests an intrinsic value for ASOS that is higher than its current enterprise value, but with earnings visibility much lower, important questions still to answer and shorter-term catalysts lacking, we move to ‘hold’.”.
In late morning trading, shares rose 4.2% to 2,726p.