Broker snap: ASOS on super-premium

11th Dec 2009 13:28

It's a case of 'nice company, shame about the share price' for online fashion retailer ASOS in the eyes of Charles Stanley.The broker has initiated coverage of the stock with a 'sell' recommendation and a price target of 350p, calling its rating 'primarily a valuation call'.The fast growing company recently saw profit growth slow, with pre-tax profits in the six months to September up 9% at £4.4m, on sales 47% higher at £96.5m. Despite this, it is still a fast growing company in comparison with most of its bricks and mortar competitors, and this has led to a significant outperformance by the shares over the last 12 months relative to the FTSE All share, 'with particularly pronounced momentum in the past 3 months (+42%) and 1 month (+18%).'As a result, Charles Stanley analyst Peter Smedley observes, the shares are on a 'super-premium valuation' of 27 times projected 2010 earnings per share, compared to a price/earnings ratio of 14 on projected earnings for the UK general retail sector. Such a rating means the shares are 'priced for perfection', in Smedley's view, which makes them vulnerable to a potential setback if the company fails to deliver the sort of growth the market is expecting.'For now we have established 3 year estimates in line with consensus. However, we would not be surprised if those forecasts are not delivered,' the broker said, citing the company's 'aggressive investments in technology and marketing,' which will occupy management time, along with the 'major capacity planning projects the company is currently undertaking.'