AO World: Equity Development


AO has exited FY24E with good momentum and we anticipate AO’s excellent customer service and AO Five Star membership club offer will accelerate repeat customer purchases across a broad range of electricals. This underpins our forecast revenue CAGR of 13% FY24E-FY27E and our Adj. PBT CAGR of 26% FY24E-FY27E. As a capital-light online retailer, we predict over 80% of Adj. PBT converts to free cashflow (“FCF”) resulting in over £130m FCF FY25E-FY27E. We initiate coverage with a Fair Value of 140p based on a 5% cal 2025 FCF yield, equivalent to c.11x cal 2025 EV/EBITDA and c.22x cal 2025 PER, under 1x our EPS CAGR FY24E-FY26E.
AO’s “Pivot to profit” strategy has worked; AO is lean and focused
In the past two years AO has refocused on its profitable UK major domestic appliances (“MDA”) business and reset its unit economics in the broader £30bn electricals market. Consequently, the group has guided to c.£33m of Adj. PBT in FY24E, generated over £30m FCF and returned to revenue growth in 4Q24E. Moreover, despite headwinds, AO continues to give excellent service, with more than 500,000 Trustpilot reviews, resulting in a five-year high average rating of 4.8/5 in May 2024.
Ready to grow again, with a highly satisfied, repeat customer base
From this solid foundation, AO is focused on increasing its 16% UK MDA market share and deepening its sales in adjacent electrical categories. Building on its market-leading flexible delivery, installation and recycling offer, AO is promoting its Five Star Membership club which we see as key in driving repeat purchases across the product ranges. AO’s total customer base is approaching 12m and assuming c.10% return each year, driving the annual repeat customer rate above 50%, we forecast AO’s existing customers will support double digit revenue growth, leading to a doubling of Adj. PBT to c.£66m in FY27E and c.£130m of cumulative free cashflow (“FCF”, FY25E-FY27E).
High growth prospects and cashflow conversion appeals: 140p Fair Value
AO offers high revenue growth, operating leverage and substantial FCF. Moreover, our blue-sky scenario analysis illustrates the potential for Adj. PBT to exceed £100m in FY27E, more than triple FY24E. We initiate coverage of AO with a 140p Fair Value equating to a cal 2025 FCF yield of 5%.
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