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Amazing what the absence of a profit warning can do. Asos, which had delivered three in six months, had no fresh setbacks to confess and the share price rebounded 16%.
Is it back to races then? Should investors keep their eyes on “the very big prize”, as the online retailer’s chief executive, Nick Robertson, puts it? That is “to be the world’s leading fashion destination for twentysomethings”. The next staging post is annual sales of £2.5bn, a jump from last year’s £975m.
Given the rate of progress – a 27% rise in revenue, with Britain doing much better – Asos clearly has a sporting chance of getting there in the hoped-for five or six years. The question, though, is how much investment is required, and what level of profit margin will emerge if/when the destination is reached?
Even a year ago, the Asos fanclub thought the company was capable of running with pre-tax margins of 7%-8%. That is off the table for now. Robertson concedes Asos will operate at 4%-5% for a while as it upgrades its infrastructure (in Barnsley, and then at its “Eurohub” in Grossbeeren in Germany) and adapts its prices to local markets. The latter factor caused havoc last year when sterling strengthened and Australians and Russians found their dresses 20% dearer.
Analysts’ new assumption is that a 6% margin might be possible come 2019. That would imply pre-tax profits of £150m, compared with £47m in the last financial year. Terrific, if it happens. But, given that profits are set to be flat this year, a dose of scepticism ought to apply.
The past year has demonstrated that operating in 200 countries presents huge logistical challenges; the new local pricing model should solve last year’s headache, but others will emerge, especially when stiffer competition arrives.
Rather than dream of what might happen in 2019, investors should take the current pulse. Asos remains a great business and Robertson deserves the acclaim. But the shares, even after falling from £70 to £22.60 since February, are rated at a mighty 50 times earnings. That’s expensive. Bulls are still expecting too much, too soon.
The RBS talking shop
What do they do all day at UK Financial Investments, the body that manages the state’s holdings in banks? They hold meetings about when might be a good time to flog a few shares in Royal Bank of Scotland.
Oliver Holbourn, head of capital markets at UKFI, told MPs yesterday he had met advisers at JP Morgan five times in the past month to discuss the matter. Blimey, five meetings in a month. Is the great day of the first RBS sale getting close?
Well, no, actually. As Holbourn went on to concede: “There are a number of outstanding issues that need to be dealt with, in particular on the conduct and litigation side where the sizes of some of those issues are at this stage unknown.”
Quite. RBS is one of six banks at the centre of allegations of rigging the foreign exchange markets. Then there’s a sensitive investigation into the selling of residential mortgage bonds in the US. Both are huge for RBS.
It is safe to assume that no RBS shares will be offered for sale for at least a year, certainly not before the general election next May. And, as the stock would be easier to shift with a sniff of a dividend, 2016 seems more likely. There is really no need for so many meetings.
Andrew Tyrie, chairman of the Treasury select committee, has long regarded UKFI as a fig leaf to disguise Treasury control over RBS. He’s referring to government intervention in bonus decisions and thinks UKFI should be absorbed into the Treasury. He’s right: what’s the point of a talking shop that is often overruled when the debate gets serious?
Gonzalez can’t complain
As AbbVie prepared to transfer $1.64bn (£1bn) to Shire to cancel the £32bn takeover, chief executive Richard Gonzalez raged about the unfairness of it all. He blames the US Treasury’s “unprecedented unilateral action” against corporate inversions and thinks longstanding tax principles have been reinterpreted “in a uniquely selective manner”.
Gonzalez is entitled to his opinion and many agree that the US corporate tax regime is a mess. But he can hardly pretend the action came out of the blue. Senior US officials had been muttering for months about how they would crack down on “economic traitors”. Nobody should have been surprised when new rules were announced last month.
Gonzalez, we must assume, thought AbbVie’s already-announced deal with Shire would get in under the wire. He was wrong and has cost his shareholders a large sum. Rather than rant, he should have offered to resign.
