Forum Topics Message for CHill
Tom73
2 weeks ago

Good questions elpaso96 and great valuation and model CHill.

My valuation from Feb is very similar, I will attach to a straw for your reference which I didn’t at the time due to needing a better format (as you will see).  The only significant variances I have is around discount rate (9% Vs 10%) and perpetual growth rate (5% Vs 3%) which make a big difference in terminal value.  I just think KGN has a very very long runway (much like Amazon had and still does), which is totally underappreciated – but each to their own on this.

To Bear’s point on margins, a good one that I would go with normally, but as Chill points the Kogan marketplace is why they will grow.  My valuation explains this more so I wont repeat.

Great work and great questions everyone – model, test, model, test gets to the best!

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CHill
2 weeks ago

Nice model @Tom73. Good to see a few minds ticking over and asking questions. Our 2 models really highlight just how much a few small adjustments can result in a huge differnce in "fair value". Onto the next stock for me!

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elpaso96
2 weeks ago

Yea that terminal growth changes the game in a DCF. Every percentage change in the terminal growth would +- 15% of the existing valuation. The safest way to navigate is sensitivity analysis. 

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elpaso96
2 weeks ago

Good Attempt CHill :) 

A couple of questions I have for the valuation

  1. what was your perpetual growth rate for working out terminal value?
  2. Are you saying that Kogan can maintain their competitive advantage for the next 10 years even when they expand out of Australia? 
  3. Have you considered the possibility that Kogan may need to do future acquisitions to maintain revenue growth? Which means it should hurt margins if the acquisition does not work out. Agree with Bear77 on the high gross margins, I don’t think they can sustain that if they are forced to do acquisitions.

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CHill
2 weeks ago

@elapaso96

Perpetual growth rate I used was 3% and a required rate of return of 10%. So i discounted future cashflows by 10% ^ number of years. Terminal value using the 2 percentages with your standard formula.

eCommerce penetration in Aus is very low compared to the rest of the world and last year Australia had the largest ecommerce % growth in the world. I think this is a fundamental shift for aussies and we'll see online stick around. I think the 12% growth falling to 7% by 2030 is rather conservative. Yes competition is a risk but I think theres plenty of market share to go around. 

Kogan has a strong balance sheet and I believe the correct acquisitions will only add strength to the balance sheet. I've allowed somewhat for future dilution as well.

Appreciate the feedback.

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elpaso96
2 weeks ago

@CHill

If the Australian ecommerce market has low penetration like you say, then your assumptions are not outlandish. Kogan does have a good balance sheet, but the acquisition of Mighty Ape will cost $122M, which represent a decent chunk of Kogan's cash in the balance sheet. Granted, they are making the acquisition payment in traches, Kogan is betting on growth in operating cashflow to fund the acquisition. I am uncertain on the "I believe the correct acquisitions will only add strength" - Kogan is paying quite a lot for the Mighty Ape acquisition. There is a risk of the acquisition not working out. We will only know the outcome of the acquisition in the following years.     

Good that you use 3% perpetual growth, in line with GDP.

The discount rate of 10% is fairly high but good to be conservative I guess. 

Good valuation mate :) 

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HiVisEngineer
2 weeks ago

Hi Chill, really like your DCF template, looks better than anything I've tried to build - any chance I can get a copy of the native? :)

I did have two questions,

1. Do you see the CAPEX being that great of a %$ every year, particularly if the marketplace portion of the business (where I don't believe they actually hold stock, merely just market it) grows faster than their in-house portion? Or are you considering that even their own stuff will grow at a rate that requires big investments into warehousing & logistics?

2. Gross Margin - I note others have questioned the margin too, do you forecast that growing as a) marketplace grows (low effort decent margin) offsetting any drop in margin for their in-house businesses, b) tax rate drops which aids profits and c) bigger business with more efficiencies that come with size?

More and more recently I feel like I have dismissed Kogan for far too long as a company worthy of owning a part of! (and particularly at current prices)

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CHill
2 weeks ago

@HiVisEngineer I think CAPEX was higher than it needed to be, as you said marketplace will require near 0 capex to run. I anticipate that CAPEX may increase as they blend the Mighty Ape business together with Kogan. I've also allowed for expansion in distribution and the likes. Overall I think CAPEX was over stated and likely to be somewhat lumpy throughout the 10 years.

Gross margin I've grown from their historic rates due to the uptake in marketplace. Havent increased this much over time so think it's a fair assumption. I've accounted for the drop in Tax rate as another line item down from effective tax rate of 31.5 to 28%. Agree efficiencies will be gained with scale.

Overall I think KGN was oversold as it was seen as a COVID beneficiary and could present oportunities. Is it currently at the bottom? Only time will tell.

Thanks for the feedback

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Bear77
2 weeks ago

Hi @CHill, your attachment in your Business Model/Strategy straw for Kogan did not work - there is no file.  If the file is larger than 2Mb it won't get attached, or if it's the wrong format (the site likes JPG, PNG, PDF or DOC files, but not any other file types), and (finally) if there are certain characters in the file name - then the site will not accept the file.  One of those characters that the site dislikes in file names is the apostrophe (').  I found that a file called ABC'H1'Report.png would NOT be accepted, but if I changed the file name to ABC-H1-Report.png, it would work (example only).  Obviously, the site doesn't have any issues with the use of hyphens (-) in the file name.  Other potential problem characters are spaces, dots and some of the special characters found above the numbers on most keyboards (!@#$% etc). 

You can usually get the file to attach to your straw if you ensure (1) the file size is under 2 megabytes, and (2) is the correct file format (one of those 4 that Strawman.com likes - .jpg, .png, .pdf or .doc - being pictures, Adobe Reader files or Word documents) and (3) by simplifying the file name - including replacing any spaces, extra dots and other special characters with hyphens (-).

Hope that helps.

 

P.S.  Back in 2018 and I think in early 2019 as well I found I could copy and paste pictures into straws, and I still have a number of those old straws full of pictures (photos, images, graphs, etc.) still floating around this site - like my "#ASX Announcements and Stuff..." straw for ARB - about the 7th straw down - however we haven't been able to paste pictures or images into straws for a couple of years now here, so the only way to include them is via the "Attach File" feature in straws (not available in forum posts or in valuations) - and the "Attach File" feature has it's limitiations, as discussed above.

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CHill
2 weeks ago

Thanks @bear77 will repost now

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Bear77
2 weeks ago

Yep, that worked.  What was the issue?  File size, file name or file type?

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CHill
2 weeks ago

File name, didn't like the & I had in there. Thanks for the help

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Bear77
2 weeks ago

Your valuation for Kogan @CHill looks good, and quite comprehensive, however I'm not sure if they can keep increasing revenue at that rate every year as well as gradually increasing their gross margin % as you have suggested they will.  With a gross margin of 28%, there could be an argument mounted that they are already over-earning, and that history suggests that their margins are more likely to reduce over time than to increase.  However, if they DO achieve those metrics, then yes, they would be worth more than where they are trading now, but I'd want a decent MOS (margin of safety on your valuation) to compensate for the possibility of things not all going 100% to plan in terms of the optimistic assumptions in the valuation.

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CHill
2 weeks ago

Appreciate the feedback @bear77. The first 3 years of revenue growth are analyst expectations, usually when I do my DCFs I like to use my own numbers but in this case, I used theirs for simplicity. As for the remaining years I based my expectations on the following: Low penetration of ecommerce in Aus relative to the US and other countries, this sector should grow over time. I expect KGN to improve their market share of australian retail as ecommerce picks up traction. As for the improving gross margin, i do see your point however Kogan marketplace will only improve their gross margin as this sector of the business grows. What I haven't considered is the affect that Mighty Ape will have on their overall margins, I imagine there will be significant investment required to truly benefit in the synergies of these businesses.

 

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Chalky1610
2 weeks ago

UBS as of last week, currently has a neutral rating on its shares, its price target of $15.10 is notably higher than where it trades today. Let's not forget a proposed $0.32 dividend as well. 

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