Morgan Stanley analyst suggests that unless cash flows improve, ASOS may need to scale back its spending and growth ambitions.

ASOS plc (LON:ASC) could find itself uncomfortably tight on liquidity, Morgan Stanley analyst said. Maintains an ‘underweight’ rating and lowers his target price to 3,200p from 5,000p.

Morgan Stanley said the online fashion retailer is burning cash, having spent £400mn on CapEx in the last two years which is more than the previous 15 years put together. CapEx was mentioned by analysts before as an issue the company will have to overcome earlier this year. The company has revised guidance on CapEx upwards.

“ASOS had £173mln of net cash on its balance sheet in September 2016. However, it burned through £13mln in fiscal year 2016/17 and a further £117mln in fiscal year 2017/18, leaving it with just £43mln of cash in September 2018.”

The investment bank said ASOS has sufficient liquidity for the near future after increasing its borrowing facility to £150mln but expects £90mln of net debt in August 2020 when the company could find itself could find itself “uncomfortably tight” on liquidity ahead of peak trading.

“Unless cash flows improve, it may have to scale back its spending and growth ambitions,” Morgan Stanley said.

Morgan Stanley lowered its earnings forecasts by 7-17% over the next three years on higher depreciation and amortisation costs, meaning it sits 26% below consensus forecasts by fiscal year 2020/21. It said margins need to increase to 8% in 2020/21 for ASOS to meet its medium-term target but given the historical margin trajectory, “that feels demanding”. It doesn’t come as a surprise that ASOS may have to lower margins to maintain its current top-line growth. The trade-off between higher operating margin vs sales growth has been there for a while. ASOS has so far managed to maintain the 4% EBIT margin with the sales growth remaining robust.

“We now assume EBITDA margins will expand 50 basis points to 7.6% by the terminal year (previous estimate 200 basis points to 9.1%) contributing circa 75% of our price target revision.

“Combined with higher CapEx and tighter working capital we now expect £170mln cash outflow through FY2020/21 (previous £100mln inflow).”

In morning trading, shares fell 10% to 4,052p.