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ASOS - set to issue new equity

ASOS has announced its intention to raise around £80m of funds by issuing new equity shares, including an offer to retail investors...

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ASOS has announced its intention to raise around £80m of funds by issuing new equity shares, including an offer to retail investors of up to £5m. The amount represents around 20% of the group's existing ordinary share capital and will be sold at a price of 418.1p per share, reflecting the closing price on 25 May.

ASOS also refinanced some of its debt, and estimates the average annual interest rate on the new debt facilities will be around 11%, taking the average rate across all borrowings to about 5% .

The group expects these changes will aid a return to return to profitability and cash generation.

The shares rose 5.7% following the announcement.

View the latest ASOS share price and how to deal

Our view

ASOS announced it's raising money by placing up to £80m worth of new shares. These proceeds will be used to help strengthen the balance sheet and create a stable base for a future return to growth.

Equity issues are not usually a good sign. Cash-strapped companies tend to issue new equity only when they really need to, because it waters down existing shareholders' ownership in the company. Given ASOS' net debt and cash outflows have been rising, it's not a complete surprise to see the group resort to this measure.

The group's top line has also been falling. The most recent declines were blamed on the group's lower marketing spend, as well as reduced levels of discounting as it aims to prop up profitability. For now, lower freight rates coupled with price hikes on the group's own brands are helping to keep the underlying gross margin broadly flat.

Times are tough. ASOS' position as a middle-of-the-road retailer means it's particularly vulnerable to consumers with shrinking budgets. It's not as cheap as Primark, but customers aren't as resilient to a downturn as they are at luxury names. To a certain extent, this is out of the group's hands, and medium-term demand will depend on what happens to the economy. That makes it important to assess plans for long-term growth.

A thorough review of underperforming overseas markets, where extensive investment hasn't yielded strong results, has led the group to reallocate resources away from the US. Improving profitability has become the number one priority, but pushing cost cuts too far could be problematic in the long run. International markets, especially the US, hold the key to the group's future growth, and sacrificing investment in these markets now could come back to bite ASOS when market conditions recover.

For all the challenges, there are some bright spots.

There's been a big drive to clear out excess stock, which came down 9% in the first half. There's further work to be done on this front, but getting excess stock off the books should provide some longer-lasting relief to margins moving forwards.

On the cost-cutting side, the group's already delivered around £100m in savings in the first half, with a further £200m expected to materialise in the second half. And despite wage inflation continuing to be an issue, these cost savings are expected to return the group to profitability in the second half of the year.

Ultimately, there are long term opportunities for ASOS, but short to medium term challenges shouldn't be overlooked. The cash injection creates some breathing space to navigate choppy waters but brings with it additional pressure to turn the group's fortunes around. While the valuation has come down significantly over the past year, there's potential for further downward pressure if ASOS fails return to sales and profit growth.

ASOS key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Aarin Chiekrie
Aarin Chiekrie
Equity Analyst

Aarin is a member of the Equity Research team. Alongside our other analysts, he provides regular research and analysis on individual companies and wider sectors. Having a keen interest in global economics, he knows how macro-events can impact individual companies.

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Article history
Published: 26th May 2023