ASOS shares surge 40% in 40 minutes!

Investors have reacted positively to statements released by ASOS after the market closed last night.

Investors wasted no time snapping up cut-price ASOS (LSE:ASC) shares as the online retailer set out its plan for ensuring that it has the firepower to withstand the Covid-19 crisis.

A £247 million fundraising announced yesterday after the stock market closed, was said to be four-times oversubscribed by existing institutional shareholders at a price of 1,560p.

That compares with more than 3,000p in February prior to the recent market sell-off. It's little wonder that banks and institutions were so keen, given that shares had been changing hands at more than 7,500p just two years ago.

Retail investors were excluded from the placing, but still benefited as shares rallied on the company's reassurance that it has the liquidity to survive a prolonged 18-month downturn. By 8.40am today, ASOS shares had risen by as much as 41% to 2,200p, meaning the AIM stock had more than doubled in value in less than a week.

Source: TradingView Past performance is not a guide to future performance

Confidence was helped by the accompanying release of interim results, which showed strong sales momentum prior to the pandemic, as ASOS recovered from a string of 2019 profits warnings triggered by warehouse disruption. Pre-tax profits of £30.1 million were significantly higher than the £4 million of a year earlier and the £10.5 million forecast in the City.

Analysts at Numis Securities said the results and placing were “meaningfully positive steps forward”, even though near-term forecast risks were elevated following a sales fall of between 20% and 25% in the past three weeks.

Numis, which has a price target of 3,700p, added:

“ASOS won’t be immune to the industry disruption and inevitable gross margin pressure, but we do believe they can emerge from it better placed. Valuation on an absolute and relative basis points towards compelling risk/reward.”

Jefferies, meanwhile, increased its price target by 300p to 2,300p, saying that the company was now “capitalised to survive and thrive”. They added:

“Structurally we expect Covid-19 to accelerate the shift online, with ASOS set to benefit from high street closures.”

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ASOS's trading and financial resilience helped lift shares elsewhere in the fashion sector, with Superdry (LSE:SDRY) up 15% and AIM-listed Boohoo (LSE:BOO) ahead 8%. Next (LSE:NXT), which unlike ASOS has been unable to trade from its warehouses due to Covid-19, fell by 2%.

ASOS's warehouses remain operational, but with lower capacity and social distancing measures in place for staff. The trading pattern across countries has been consistent, with a demand shock upon entering lockdown that partly moderates over time.

Stress testing of various scenarios suggests that ASOS has sufficient liquidity under its existing £350 million revolving credit facility. Its largely variable cost base means the scale of the business can be altered on a 6-12 weeks’ time frame.

As well as the placing of the shares, which is the equivalent to 18.8% of existing share capital, ASOS is also putting in place an extension of £60-80 million to the credit facility. Lenders have agreed to adjust a debt covenant test for the next 12 months, while there's the possibility that ASOS is eligible for the Bank of England's Covid Corporate Financing Facility.

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CEO Nick Beighton said the measures meant the company would not be forced into short-term liquidity or cash management decisions that end up hindering its long-term prospects. It should also mean the company is in a stronger position to invest once the crisis is over.

He said:

“The Covid crisis is clearly going to continue to be tough for everyone and the short-term outlook remains highly uncertain, but the measures we have taken ensure we are able to be clearly focussed on making sure that ASOS emerges as a stronger and better business.”

WH Smith and catering firm SSP (LSE:SSPG) are among other well-regarded stocks to have undertaken similar pre-emptive capital raising moves in recent days.