Shares of online electrical retailer AO World (LSE: AO) are trading 6% down at 136p after it released its annual results this morning. These show top-line growth of 17% to 701m from 599m last year but an increasing bottom-line loss of 7.4m compared with 6.1m.
The loss is due to expansion into Germany and the Netherlands continuing to more than eat up UK profits. The company has raised 50m since the year-end to help it build scale in Europe. But I still see risks that make this a stock Id probably avoid.
AO lets go
The UK is AOs largest market and revenue here increased 13% to 630m from 559m. However, looking behind the full-year numbers, my sums say revenue slowed from 19% in the first half of the year to just 8% in the second half. This puts into sharp relief the companys statement that it saw a challenging trading environment in the UK in the second half.
With inflation rising and wage growth slowing in the UK, Im expecting things to get worse, as consumers tighten their belts and put off purchases of the white goods and computers that AO specialises in. If we ignore the lossmaking European operations, I calculate a P/E of 40 based on the UK businesss adjusted operating profit of 19.9m, no finance income or costs and a standard tax rate.
This is a high-growth P/E, which I dont see as justified for a low-margin business in a challenging trading environment with a risk of earnings downgrades. I reckon theres plenty of scope for the shares to fall further.
I suspect AOs low margins would be even lower but for the sale of product protection plans. These plans are currently not deemed to be regulated contracts of insurance but the company says any change to this and potentially consumer compensation claims could have a material adverse effect on the groups business and financial condition.
This risk lurking in the background is a further reason why Id probably avoid investing in the company.
Exception to the rule?
BNN Technology (LSE: BNN) is another currently lossmaking company with a tempting growth story where the risks lead me to lean on the side of caution. The company was founded by a former stockbroker to enter the Chinese online lottery market and was floated on AIM in 2014.
A year later, the Chinese authorities placed a temporary ban on online lotteries (which still seems to be in force today). BNN launched a strategy of diversification, still within China, and in its 2016 results said: We have pivoted to becoming a technology portal in China.
Having raised 51m in 2016 and a further 25m so far this year, BNN has invested in various ventures from mobile phone top-ups to student-led technology start-ups. To date, it has been rather more successful at raising money from investors than building a profitable business. Its also yet to deliver a secondary listing on the NASDAQ exchange, which it first promised for Q1 2016 and which its currently saying will be later this year.
Shareholders remain excited about the potential, but history shows that the vast majority of AIM-listed companies doing business in China have been disasters for investors. Will BNN prove to be one of the exceptions to the rule? Its a risk too far for me.
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