Interactive Investor

Amazon to buy ASOS, says expert

6th October 2014 13:55

Lee Wild from interactive investor

Losing almost three-quarters of your value in just seven terrifying months must rank ASOS as one of the most spectacular falls from grace in recent years. But the online fashion retailer's bombed-out share price - currently glued to major technical support at around £20 (see chart) - might just attract the interest of American behemoth Amazon, reckons UBS, which might pay up to £50 a share.

"We think significant value could be added to ASOS via a combination with a larger online retail organisation which could amortise IT and logistics costs and improve the transactional FX risk," says UBS.

It adds:

Amazon intends to increase its international and clothing exposure and is not averse to consolidating the online retail space. The acquisition of Zappos and rollout of Amazon clothing has hinted at the ambition but we think an acquisition of ASOS would increase the strength and number of brand relationships and give access to a fashionable, low price own label offering.

We estimate that utilising the Amazon advertising relationships, brand awareness, Amazon Prime customer base, logistical infrastructure and importantly the IT platform to allow more sophisticated pricing and promotional strategies would have the potential to more than double the current ASOS margin.

(click to enlarge)

But why is a takeover ASOS's best hope? Well, UBS has just cut pre-tax profit estimates for 2015 by 25% and by 35% for 2016 to £47 million and £58 million, respectively. That gives earnings per share (EPS) of 42.3p and 52p.

Underinvestment in the IT platform has been uncovered by strong Sterling and this has been compounded by significant investment in global logistics. We believe the strategic decision to invest in local logistics, pricing and IT to maintain sales growth is correct even at the expense of short-term margins. However, in our view global online fashion is becoming more competitive and longer-term EBIT margins will be dictated by execution and efficiency. In this regard scale and platform are paramount…

UBS still thinks ASOS shares are worth £40.50 based on a combination of 50% discounted cash flow (DCF) worth £31, and 50% on a takeout premium (£50).

Clearly, it's the takeover that looks much the better option here, for at 2,057p shares in accident-prone ASOS trade on 49 times forward earnings and a still mind-boggling 40 times estimates for 2016. Without Amazon, or another white knight, it could be years before ASOS shares ever see £50 again.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.