In the past Asos, like AO.com and Ocado, has been one of those stocks you can buy solely on trust because the multiples on which the shares trade appear to bear no relationship to the stock market as a whole or even others in the sector. This column has suggested in the past that the only sensible strategy has been to buy on any weakness, which has tended to be followed by a sharp recovery, and sell when they look like peaking.
Interestingly, since the spring the shares have been fairly stable by their standards, revolving around the £6 level. This week’s results at least suggest a continuation of what has been an astonishing growth story in retail terms. The number of active customers shopping with the company rose by 24 per cent, while the total number of orders shipped were 30 per cent ahead year-on-year.
Asos has a strong position in the twentysomethings market as a provider of cheap and fast-changing online fashion, offering about 4,000 items at any one time that can be turned around and refreshed in a couple of weeks. That is a fickle market, but Asos’s technological strengths play into it, even if it may be difficult for the average middle-aged fund manager to get his or her head around it. The Americans get it, though, and approaching a third of the shares are held there. The market capitalisation of almost £5 billion would suggest a full listing and a place in the FTSE 100, but Asos stays doggedly on the junior Alternative Investment Market and just as resolutely refuses to pay a dividend.
The company is able to say with some confidence that sales will grow by 25 per cent to 30 per cent over the coming year and at a rate of 20 per cent to 25 per cent a year for the appreciable future thereafter. Its aim is to get to sales of £4 billion, which at that rate of growth should be reached within four years. The investment is in place, including a new hub in Georgia to allow the 60 per cent rise in capacity needed to achieve this.
The company is encouragingly open about future spending plans and cashflow to support it. Capital spending will peak at £200 million to £220 million in the year to the end of August and thereafter it will be cash-positive. The shares, off 260p at £54.90 yesterday, sell on almost 60 times this year’s earnings. That £4 billion figure would assume a doubling of last year’s sales figure; double earnings and then add some incremental improvement and the multiple still is well above 25 once that target is met. Still, very expensive short term.
My advice Avoid
Why Though unlike other online retailers Asos is open about how it expects to grow, the rating still requires a high degree of faith
Rathbone Brothers
It has been an interesting couple of months for Rathbone Brothers. Merger talks with Smith & Williamson foundered at the end of August over price, a deal that would have added to the consolidation in the fund and wealth management sector. A week or so later the shares fell by 10 per cent at one point amid bizarre allegations by an online crank about its business practices.
Although the shares, up 45p at £25.90 after the third-quarter trading update, have not returned to their peak of about £28 in late August, the potential disruption from the merger talks does not seem to have done the business any harm. Funds under management were up by 2.5 per cent to £32.5 billion, split exactly equally between net inflows and market movements.
The company is continuing to invest in updating its services to clients and coping with the forthcoming requirements of the Mifid II regulations. The third-quarter numbers were pretty much in line with estimates, while further consolidation cannot be ruled out and that investment eventually will feed through to better margins. The shares sell on 19 times earnings and, given the relatively low dividend yield and the uncertainties ahead for the sector, that looks high enough.
My advice Avoid
Why Rating looks about right, given unclear picture ahead
RWS Holdings
Andrew Brode, chairman of RWS, says that the purchase of Moravia for $320 million is “the big one”. It is certainly the biggest in the company’s history. The two deals since 2015 that have created its life sciences division were both below $100 million.
RWS, which has grown into a company with a market worth of well above £1 billion, provides services that enable corporates to translate literature and patents across the world and to protect their brands and copyright. The purchase adds revenues equivalent to almost half RWS’s existing total and about a third of profits; the mismatch is because Moravia, which specialises in the technology sector, is lower-margin than its existing operations. It creates a company with revenues of approaching $400 million, the third biggest player in a $43 billion market.
Moravia, as the name suggests, is based (for entirely historical reasons) in Brno in the Czech Republic, but it has substantial operations on America’s west coast and counts Microsoft as its biggest client. RWS is paying about 12 times earnings, which looks fair enough for a high-growth business. It is funding the deal with new debt and a £185 million placing. This is one of those deals that come about infrequently and are hard to turn down. It will be earnings-enhancing from the off. The shares, forced higher in thin trading as the deal went through, fell 79p to 460p. This does not reflect market distaste for the purchase. On 26 times this year’s earnings, the shares look worth buying again.
My advice Buy
Why Shares are not cheap, but deal looks a good one
And finally . . .
Zytiga is a treatment for prostate cancer that is gradually coming off patent protection. Numis Securities is excited about third-quarter sales for the drug reported by Johnson & Johnson and the implications for BTG, its London-quoted partner. Johnson & Johnson reported a 25 per cent rise in sales. BTG put out a short trading update at the start of this month and Numis thinks there is scope for favourable updates at the halfway figures next month and at a capital markets day in December.
