Shares in AO World (LSE:AO) were dropping yesterday ahead of an announced placing offer this morning via PrimaryBid. Stock had fallen off a cliff at the end of last month from around 70p to trade in the mid-40s going into the start of the week.
The company has gone back to the market this morning with an announced retail offer via PrimaryBid. This followed an announcement of a non-preemptive placing of new ordinary shares at 43p. AO World said that the net proceeds of the capital raise will strengthen the balance sheet and increase liquidity back to historic levels (relative to revenue base), and provide the flexibility to capitalise on market opportunities.
Why is AO World going back to the market now?
Big concerns had emerged around the online electrics retailer after management confirmed that a credit insurer had cut its cover in May, voicing worries about post-Covid sales levels. The company has been at pains to reassure investors that trading was still in line with expectations. In April AO World said earnings in the year ending March 2022 would be in the region of GBP 8m.
“The company continues to consider and implement a number of ongoing initiatives and further actions to strengthen its balance sheet while optimising its focus on profit and cash generation against the uncertain macroeconomic conditions in the UK and the continuing global supply chain challenges,” AO World said in an earlier statement.
Why is credit insurance important to AO World?
Credit insurance is fairly standard in the electric goods industry. It is used to ensure that items can still be delivered, reducing the risks to consumers if a retailer collapses. The move is being viewed as a red flag by investors, however, who have been dumping stock fast this week. The lack of credit insurance means that suppliers will demand payment upfront, which could compound the cash flow issues investors have already detected at the company.
Management had said that the company could tap a GBP 80m revolving credit facility should it be required, but even yesterday there was increasing speculation on forums that investors would be asked to pony up with a further share issue.
AO World was a major beneficiary of the lockdown, especially when bricks and mortar retailers were forced to close due to the pandemic. Since its competitors reopened life has become tougher.
Closure of German operation
AO World investors were also worried by news that the company was closing down its German operation, which has traded for eight years and accounted for approximately 10% of revenues. This came in the wake of an announced strategic review in January which estimated the cost of the German closures as somewhere in the region of GBP 15 million.
Investment bank Jefferies said that AO World was in the process of shoring up its finances and was “tight on liquidity” but reiterated that they were not aware of any negative news in the pipeline. The German operation is considered to have been something of a cash drain, and its closure could improve the situation.
Broker JP Morgan Cazenove rated AO World underweight 4 July with a target of 59p. It had previously slashed the target from 103p going into early May.
