Jefferies upgrades AO World to ‘buy’, highlights ‘attractive’ entry point

Jefferies upgraded online electricals retailer AO World on Monday to ‘buy’ from ‘hold’ as it pointed to an "attractive" entry point into a "structural winner with a huge long-term growth runway" after the shares have fallen 44% year-to-date.

The bank said AO’s recent FY21 results marked an outstanding year with revenue growth of 59%, group EBITDA up 191%, and positive trends across categories, KPIs and countries.

"The pandemic clearly presented a substantial tailwind, but we think much of what was achieved equally reflects the fundamental qualities of AO’s business model and the substantial investments made during the year. Moreover, we think many of the benefits are set to roll into future years.

"On the back of an outstanding FY21, AO is taking the opportunity to invest in driving an accelerated growth trend and is aiming to double revenues by FY26," it said.

Reflecting the opex elements of AO’s announced investments, Jefferies cut its FY22 EBITDA estimate by £28m to £53m but materially upgraded its UK revenue expectations. It had previously forecast FY22 UK revenue growth of 1.5% but is now looking for growth of 10%. By FY23, Jefferies expects UK revenue of £1.8bn, up 19% on its previous estimate.

"We expect this growth to be supported by greater brand awareness, improvements in conversion, the continued rapid scaling of newer categories, and the development of adjacent services and products," it said.

Jefferies left its price target on AO World shares unchanged at 400p.

At 1100 BST, the shares were up 2.4% at 237.40p.