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AO World shares shrink to 'fair value' for ShoreCap after recent tumble

The broker upgraded its recommendation for AO to ‘hold’ from ‘sell’, having previously felt the retailer's share price was "too far ahead of events"

washing machine
Shore Capital sees the share price's fair value in the range of 60p-79p

Shore Capital has upgraded its recommendation for online washing machines, ovens and fridges retailer AO World PLC (LON:AO.) after its shares tumbled lower in recent months.

The electricals retailer, which expanded its offering via December’s acquisition of Mobile Phone Direct, has seen its shares wrinkle by 28% to 79p over the past month, extending their shrinkage over the past 12 months to 53%.

READ: AO World remains in the red despite new mobiles addition

Underperforming the FTSE Small Cap index, ShoreCap's analysts said the current share price has moved down towards their fair value range of 60p-79p.

In a note to clients, the analysts said: “Our view on the company for the last 18 months has been that the share price was too far ahead of events, but given the recent material share price movement downwards, we believe that now is the right time to pause for breath.”

They upgraded their recommendation for AO to ‘hold’ from ‘sell’, noting that while the current price means AO's enterprise value is 43 times higher than forecast underlying earnings (EBITDA), this will come out in the wash in 2021 with a fall to 25.4 times.

AO's recent annual results showed continued momentum in the UK, while the European business grew revenue strongly but remained loss making, they added.

The analysts also said they feel the return of founder John Roberts as AO's chief executive was a potential catalyst for the company, with recent comments suggesting increased focus on leveraging the European infrastructure, with a breakeven point for the European division during 2021 "an important strategic milestone for the company”.

Quick facts: AO World PLC

Price: 141 GBX

Market: LSE
Market Cap: £673.89 m

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