Is There Any Value In AO World PLC, LGO Energy PLC And Bellway plc?

AO World (LSE: AO), LGO Energy (LSE: LGO), and Bellway (LSE: BWY) recently reported their trading updates, which sent mixed signals to investors. Here are some key takeaways. 

AO World

AO World’s stock price is well below the level it recorded at IPO last year, but do its fundamentals point to value? 

Its balance sheet is strong, which is not unusual for retailers. Its operating margin (Ebit margin) should hover around 1% and 3% in the next 18-24 months, which means that assuming AOL’s revenues will rise to about £900m in 2017 from £477 in 2015 (+88% — such a growth rate could be doable if it continues to grow at a fast pace, recent results showed), its operating income (Ebit) should be in the region of £9-£27m. Add back depreciation and amortisation, and AO World fetches a core forward Ebitda in the range of £10-£30m, which implies a forward valuation of between 77x and 23x Ebitda for the enterprise. 

That is a highly demanding valuation, in my opinion, also in the light of better alternatives in the retail space. AO World has been one of the most heavily traded on the LSE in recent days, but I would likely give it a pass. 

LGO Energy

With the stock up 74% since mid-March, you may well wonder whether you have missed the boat.

I wouldn’t worry too much, as there are plenty of similar opportunities in this market, although LGO is a high-risk/high-reward stock that you may want to hold as part of a highly diversified portfolio. 

Its full-year results, which were released last week, point to a company that is boosting its output: “a total of eight new wells were drilled at the Goudron Field of which seven were hooked up and producing by year end 2014,” it said, adding that it will continue to develop “proven reserves in the Goudron Field through drilling of at least seven new development wells.”

The group should be careful, however, in the way it manages its finances, given that administrative expenses almost doubled to £4.9m annually. Gross profits is rising at a much faster pace than revenues, but pre-tax losses widened to £5.11m (2013: £2.8mi) “due to one off exceptional items, short term financing costs and non-cash costs.” 

Its financials are in a relatively good shape, but if production rises as expected at its Goudron field in Trinidad this year, additional financing will likely be needed, which means that dilution risk should be taken into account. 

Bellway

Its interim management statement last week showed that Bellway is on the right path of growth. The problem is whether the stock still offers upside at this point in time, following a performance that reads +21% this year and +54% since June 2014. 

At 2,312p a share, it trades in line with its 52-week high of 2,407, which was recorded last week. 

Revenues are growing, its balance sheet is strong, its capital allocation strategy points to an efficient use of capital, while trading multiples suggest upside in the region of 20% or more into early 2016.

Its dividend is covered by core cash flows; its forward yield, in the region of 3%, is sustainable, in my view. 

Bellway remains a solid long-term value play, I’d argue.