Broker snap: ASOS rating leaves no room for error

1st Nov 2010 12:01

Despite current trading levels remaining positive and potential seen for strong growth, KPC Peel Hunt is downgrading ASOS to a sell as it believes the current shares to be overvalued."In terms of trading and forecast momentum, we believe the business is well placed to outperform over the Christmas peak", the broker said.As for performance, the internet fashion retailer continues to deliver strong levels of sales and profit growth, with Peel Hunt's forecasts pointing to an earnings per share (EPS) growth of 37%, with compound EPS growth of around 25% per annum over three years."The question that concerns us, is how best to value ASOS and how linear we perceive the growth to be", the broker said.However, concerns have been highlighted in terms of justifying ASOS's current share price, standing at around 1372p. Based on the broker's published forecasts, discounted cash flow points to a value of 900p.The broker believes that management's revenue target of £1bn by 2015 illustrates a "lack of breathing room for any slip-up". "In other words, while the next six months are likely to see strong growth and upgrades, we may then see a period of consolidation and we believe the current rating and market expectations do not support any slowdown in performance".Despite long-term growth being expected, ASOS will likely experience this in surges "rather than a linear progression". The broker has downgraded to 'sell' from 'hold', and confirmed a target price of 1,000p.