AO World has changed the world of domestic appliance retailing. If your fridge-freezer dies, you can have the new model of your choice installed before the frozen pizzas start to melt. The company is a demonstration of how to marry the internet to state-of-the-art delivery. It’s hardly surprising that investors loved the story, scrambling over themselves to get stock when it came to market in March.

And yet…there are limits to the need for next-day delivery of cookers or washing machines, and a brilliant analysis by Shore Capital suggests AO is well over them. Michael Stewart calculates that if the company eventually sold every single domestic appliance bought in Britain, the shares at 267p would still cost 22 times earnings. But this is one tough market. As he puts it: “The consumer has limited brand loyalty, price competition is incredibly high and demand is elastic.”

Unfortunately for the bulls, this is just the half of it. The other half is the sort of product insurance that the banks used to add to their loans until they admitted mis-selling and paid £15bn in compensation  (and counting). AO doesn’t break out its profits from product protection, so Mr Stewart has tried to do it for us. He notes that AO has 150 people in a call centre devoted to selling protection, and his back of the envelope calculation says they generated one-third of the company’s latest profits.

Such point-of-sale insurance is almost always bad value. Accusations of mis-selling are never far away and appliances break down so rarely. AO has amitions to take its impressive business model across the Channel, but others like Amazon have similar ideas and depper pockets. The investors who failed to get any shares at 285p in the float can have as many as they like at 267p now, but it’s easy to see why they aren’t rushing in.

Balls up for CGT changes

If you don’t like the capital gains tax regime, then don’t worry. There will be another one along if you’re patient. This tricky tax has been a playground for chancellors ever since it was introduced half a century ago, and finding a fair, stable system has eluded them all.

It makes sense to tax short-term gains as income, since one looks much like the other. But last weekend my colleague John Lee reported how he will pay 28 per cent on the gain from his 40-year investment in Pochin’s (his saga reads like a financial version of Apollo 13 – successful lift-off, near-disaster, and an improvised rescue). This is less a tax on a gain than a capital levy through inflation, and is manifestly unfair.

The previous CGT regime had allowed for this, tapering the tax to reflect the time the investment was held. When one private equity boss pointed out that this meant he was paying a lower rate of tax than his cleaner, the government panicked. Rather than simply strecthing the taper to make things fairer, it imposed the current regime.

Now Labour, casting about for something which sounds business-friendly, is is looking at the subject again. The shadow chancellor likes the idea of long-term investment, so if he gets the chance, might bring back the previous regime – a Labour government design, after all – which cut the tax on long-term gains. Besides, get-rich-quick invites taxation, while get-rich-slow suggests building something of lasting value.

Let’s be more refined

Diesel should be cheaper than petrol, but it’s years since it was, thanks to the rise of diesel cars and oil refineries set up to maximise petrol output decades ago. Refining is a grim, almost profitless business, thanks to the shale boom and ban on crude exports from the US, so it was a surprise this week to see ExxonMobil preparing to spend $1bn beefing up its plant in Antwerp to produce more diesel.

As refineries close across the continent, Exxon plans to be (almost) the last man standing. Antwerp will also help its other plants across Europe stay open by taking their heavy fractions. It’s a real, long-term investment. Don’t expect Esso’s diesel to get any cheaper, but at least that irritating price premium should eventually disappear.

This is my FT column from Saturday

Advertisements