AO World plc (lon:ao)
AO – Expanding But Forgotten About Profit?

AO World plc Financials

ItemCurrent PeriodPrevious Period
Adjusted Earnings
Adjusted EBITDA(£3m)
Statutory Profit(£15m)(£16m)
Adjusted Profit
Total Debt
Net Debt£9m(£38m)

Commentary History
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AO World plc Share Price
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Title: AO – Expanding But Forgotten About Profit?
Company: AO - AO World plc
Share Price Then: 100p
Author: Ian Smith
Date: Tue 04 Jun 2019
Comments: The results released todays say that the group now has a net debt of £9.0m compared with net funds of £38.3 the previous year, debt increased over the year to fund the acquisition of MPD and construction of the new Plastics Plant in recycling.

The results also boast that the adjusted EBITDA is a loss of just £0.4 million down from £3.4 million although the loss per share rose to 3.78p up from 2.93p in 2018. Unfortunately the real loss was £15.2 million a slight improvement on £16.2 during the previous year.

Looking deeper into the numbers suggests to me that a profitable UK business is being dragged down by losses in Europe and expansion costs.

These sorts of results can be followed a few years later with the news that the overseas operations are being shut down, the bought in expansion wasn’t a success and there were lots of exceptional costs, but once you exclude them we again had a wonderful year!

The group bought Mobile Phones Direct Ltd which seems to me to be a really odd decision, unless something new appears, and 5G isn’t it, then mobile phones are now a mature market. There will always be demand but the growth phase is over and competition is pretty much based on price and price alone.

This purchase cost about £21 million in cash and new shares worth about £17 million which at current market capitalisation is about 7% of AO.

Prior to reading the reports I had never heard of Mobile Phones Direct or its web sites but MPD generated revenues of £121.7m and EBITDA of £5.5m in the year ended 31 March 2018. Ah yes, EBITDA again, any profits?

It appears that AO has sacrificed about 18 month’s worth of profitability in the core UK business to buy MPD which current numbers suggest will take 8 years plus to recover, if all goes well.

They group also commenced building a plastics recycling facility due to be operational during 2020 to give AO the capability to sort waste plastics from our fridge plants to create an additional sustainable revenue stream.

This is starting to get worryingly diverse, sell consumer electronics, recycle white goods, sell phones and contracts, they are pretty much unrelated businesses other than if you are selling a fridge you have a van and people in the right place to collect the old fridge.

The company can say we are investing for the future and that is fine but is it really investing for the future when you are borrowing to buy a business that is fully grown and enter into a market that you limited or no experience in?. At some point you have to stop incurring debt and make profits to pay it off.

The more I look the more that I see successful businesses becoming unsuccessful by the debt repayments and the fact that the debt allowed them to do things that would never have done had they tried to grow the business organically.

I also found it disappointing to note that bonuses and incentives are heavily based on Adjusted EBITDA rather than a GAAP approved number.
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