Is there value yet in AO World PLC (LSE:AO.)?
A quick glance at the share price would tell you there is, up 25% to 50.3p.
This is despite the provider of electrical white goods such as washing machines and dishwashers reporting a swing into the red in its full-year results.
For the year ended 31 March, the group reported a loss of £32mln, down from a profit of £30mln last year.
The outlook didn’t look much better either, with it forecasting increasing macroeconomic headwinds such as labour shortages and “more volatility to navigate.”
Yet, as mentioned, shares rallied by 25%, although there was nothing in the report at a first glance which would give such optimism among investors.
However, a positive note from Jefferies suggests there may still be hidden value in the firm.
Analysts at the investment banking group were extremely bullish on the stock.
Much of this optimism was centred around the “new profit-centric pivot”, which it believes will drive earnings ahead of its previous estimates.
“The £40mln fundraising completed in July, combined with the closure of the German operation, has marked a sharp pivot in AO’s focus.”
Analysts noted that at the time of the fundraising, AO said profit will become its key metric, not growth, with any markets it is not delivering a 5% contribution getting the axe.
Additional measures to drive profitability include a revision to its current customer proposition, such as delivery charges, cost-saving measures and the creation of profitable channels, according to Jefferies.
This new approach encourages the broker to be confident enough to move it into a buy and raise the target price to 65p from 45p.
As part of this change in focus, which is all about margin, an interesting possible avenue of doing so was mentioned by Julie Palmer, a partner at corporate restructuring firm Begbies Traynor (AIM:BEG).
She notes a tactic employed by some firms in the 70s during a cost-of-living crisis, which chose to rent out household appliances while budgets are squeezed.
“I think this is just sort of speculation with the cost-of-living squeeze at the moment, but whether we will see some of these electrical operators dip their toes back into the rental market.”
“That was something that happened in the 70s when we had high inflation and recession.”
“It may be seen as a way to appeal to those in the market that are really being squeezed at the moment, while simultaneously helping with margins.”
Today’s results were nothing to shout home about, but the share price movement suggests AO World may not be dead and buried just yet.
A rethink and focus on margins in times like these make sense, and all the early signs suggest that it is doing it the right way.
All it needs to do now is implement it successfully.