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Online electricals retailer AO World has seen shares plunge amid worries over its financial strength after it emerged a credit insurer cut cover for the firm’s suppliers.
The group saw shares fall by more than 18% at one stage in morning trading on Monday following a Sunday Times report revealing AO was hit by a cut in credit cover by Atradius.
AO confirmed a credit insurer had slashed its cover in May, “reflecting post-Covid sales levels”, but insisted trading remained in line with its expectations and assured over its financial strength.
It said the cover was reduced “from the heightened levels that had been in place and required through the period of the pandemic”.
“To date this rebased cover has had no effect on AO’s liquidity position which remains in-line with the board’s expectations for full-year 2022-23,” it said.
Credit insurance protects suppliers against the risk of retailers collapsing before payment for goods is made and without this cover in place, suppliers often demand upfront payments, increasing cash flow woes.
AO has already seen its share price decimated in recent months as its trading has pared back since a boom amid the pandemic, when bricks and mortar rivals were forced to shut.
AO is certainly tight on liquidity, but we understand that there have not been any negative new developments, and that the company continues to expect its position to improve in the coming months - particularly with the cash drain of Germany now resolved
Andrew Wade, Jefferies
The group issued its third profit warning in six months in April.
AO said at the time that Britons were cancelling repair warranties on their appliances to save money amid rising cost-of-living pressures.
There have also been mounting signs that consumer spending on big items is beginning to falter amid general belt-tightening in the face of soaring prices.
Bolton-based AO last month announced it would close its German business – which accounts for around 10% of annual group revenues – after eight years.
It followed a strategic review launched in January, and warned that the closure will cost it up to £15 million.
The group said on Monday that it now expects the cost to be “towards the lower end” of the range of zero to £15 million, while it said progress on the closure was “encouraging”.
AO stressed that it still expects earnings of about £8 million for the year to March, as it guided for in April.
But this was a marked downgrade from guidance given late last year for annual earnings of between £10 million and £20 million.
AO said: “The company continues to consider and implement a number of ongoing initiatives and further actions to strengthen its balance sheet while optimising its focus on profit and cash generation against the uncertain macroeconomic conditions in the UK and the continuing global supply chain challenges.”
Retail expert Andrew Wade, at Jefferies, said AO has already taken action to shore up its finances in light of the credit cover cut, in particular by closing the German arm.
He said: “AO is certainly tight on liquidity, but we understand that there have not been any negative new developments, and that the company continues to expect its position to improve in the coming months – particularly with the cash drain of Germany now resolved.”