Top member reports
Consensus community valuation
$0.255
Average Intrinsic Value
96.2%
Undervalued by
Active Member Straws
#Financials
Added 4 days ago

FINANCIAL MODEL:

Detailed assumptions are in attached image. Highlights include:

  • Strong revenue growth since the COVID peiod
    • Recent update shows July-20 sales were $3.4m. On a run-rate basis, this is 100%+ on the previous half.
    • Expecting the high-growth rate to stablise to 25% in H2 FY21 then 10% p.a. from FY22
  • Improved Gross Margin of ~20% based on FY20 results
  • Operational Cost profile is steady (inferred from historical trends) , meaning top line growth flows straight through to the bottom line
  • Remains profitable (growing EPS)

View Attachment

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#Bull Case
Added 4 days ago

Company Overview:

HT8 is an online retailing business specialising in technology. Its primary category is IT and consumer electronics. Recently, launched the “Pro-Hygiene” which sells PPE (relevant in the current situation). HT8’s recently shifted its sales channel to be through ecommerce marketplaces including, Amazon, Kogan, Catch and Ebay.

If you look at HT8's history, it is extremely underwhelming. It used to be a part of Officeworks and was discarded by Wesfarmers. It's history on the ASX isn't great either, with consistent losses. However, COVID and their marketplace business model has lead to significant growth that is also profitable!

 

MY INVESTMENT THESIS:

  • This new business model is all about High ROE
    • Business is profitable
    • Marketplace approach means fulfillment is all outsourced so limited infrastructure spend is required to support growth
    • Operating cost base is steady meaning most of its Gross Margin flows straight ot the bottom line
  • Business model also allows for easy diversification
    • For example: Management launched a "Pro-Hygiene" division for the in demand PPE during the pandemic 
  • Has recently benefited from COVID's shift to online retailing
  • The Network Effect: Strong performances (sales and reviews) in the marketplaces will attract snowballing volumes.
    • In essence, the Brand Power of Amazon, Ebay etc. attract the traffic to their website and HT8 is able to beat-out competitors within the market place
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#Cashflow
Added 4 days ago

CASHFLOW MODEL:

Detailed assumptions are in attached pdf. Highlights include:

  • Long-term view is to be Cashflow positive with no debt
  • Profitbality in the P&L model flow through to a Positive Operational Cashflows
    • Note: Operating Cashflow may be negative in the short term as HT8 Increase invetory to meet the growing demand
  • Business model does not require any Investing Cashflows
  • $4.9m raised from the H1 FY21 capital raise.
  • Expecting outstanding debt to be paid off in FY21 due to the capital raise and recent profitablity

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#Valuation
Added 4 days ago

VALUATION

I chose to value the business using two approaches (PE Multiple and DCF). The average of Two Valuation Approaches is $0.255 for H1 FY21.

Details are attached. A Summary of each approach are below.

 

Approach 1: PE Multiple (Fair Value Estimate = $0.22)

Current PE Multiple ~20x
Avg. PE Multiple for Online Retailing is 30x (Source: Simply Wall St)

Forecast EPS = $0.0074
Fair Value = $0.22


Approach 2: Discounted Cashflows (Fair Value Estimate = $0.29)

Assumptions:
- WACC = 13.6%
- Beta = 2.36 (Investing.Com)
- Cost of Debt = 4.4%
- Cost of Equity = 15.7%
- Terminal Value = $61m
 

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#Industry/competitors
Added 4 days ago

HT8's Competitive landscape can be broken into two parts.

  1. Inter-Marketplace Competition
  2.  Intra-Marketplace Competition

HT8 is a doesn't compete againts marketplaces (Inter) instead it leverages them to bring in traffic and then competes within the marketplace (Intra)

1. INTER-MARKETPLACES

HT8 has stores in the Amazon, eBay, Kogan and Catch Market Places.

I used Google trends a proxy for consumer demand, in order to compare the large ecommerce platforms for consumer electronics (See image). Here is how they rank:

  1. JB Hi-Fi: Over double the interest of eBay and Amazon. It benefited the most from Covid, but is back at pre-Covide levels 
  2. eBay: Slightly more interest than Amazon
  3. Amazon: Slightly less interest than eBay
  4. Kogan: Half the interest of eBay and Amazon. A Quarter of JB Hi-Fi
  5. Catch.com.au: Not in the chart as it didn't register relative to the others

2. INTRA-MARKETPLACES

For this, I thought I'd focus on HT8's largest marketplaces Amazon and eBay. Success here looks like:

  • Growing sales
  • Positive reviews

Amazon 

The number of HT8 reviews as at 14-Sep (Approximately, 1-5% of sales get reviewed)

  • Lifetime = 2,554 (98% positive)
  • Last 12 Months = 2,505 (99% positive)
  • Last 90 Days = 1,626 (99% positive)
  • Last 30 Days = 527 (100% positive)

Most of the sales are in the last 12 months, with two-thirds of sales in the last 90 days.

It is the Number 2 seller at Amazon in Australia, behind Book depository, which is a different category. 

https://www.marketplacepulse.com/amazon/top-amazon-australia-sellers

eBay

The number of HT8 reviews as at 14-Sep (Approximately, 1-5% of sales get reviewed)

  • Lifetime = 1,216
  • Last 12 Months = 199
  • Last 90 Days = 163
  • Last 30 Days = 115

In the last 12 months, nearly all the feedback has been positive (1 neutral).

Over 50%, of the sales were in the last 30 days 

 

Summary

HT8 is well positioned in major ecommerce marketplaces

The increasing volumes and positive reviews indicate that it is a strong incumbent and new entrants will find it difficult to de-throne

Increasing volumes, justify the strong revenue growth

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#Bear Case
Added 4 days ago

Here are some of my concerns that I investigated:

1. Debt:

The long history and size of existing debt ($5.6m), However, on closer inspection, most of the debt is interest free from the CEO. Secondly, the recent Capital Raise could wipe out the interest-bearing debt.

  1.  $3.5m from CEO (Interest-free | No maturity)
  2.  $0.2m from CEO (Interest-free | Matures May-21)
  3.  $1.0m from CEO (Interest-free | Matures Dec-21)
  4.  $0.9m from CEO (2.5% p.a. | Matures May-22)

 

2. Negative Equity (book-value) and high debt to Equity Ratio:

Total Equity (book-value) is negative (-$3.9m). In fact, there is a long history of negative equity driven by Accumulated Losses ($12.7m) and a business funded by Interest-free loans from the CEO rather the equity raising.

The recent capital raise ($4.9m) has helped alleviate some of these concerns, as the new equity will tip the book-value positive and should help pay-off some of the debt. One positive from the business being funded by interest free debt, is that there are not many shares on issue.

Finally, the business is now profitable. This should increase equity and generate cash that can pay down debt.

 

3. Low Margin / Low Barriers to Entry 

There is no way to sugar-coat this. Online retailing in Consumer Electronics is simply low margin and fragmented, especially if you look at the several ecommerce marketplaces.

In my view HT8 isn't actively competing with large incumbents (e.g. JB Hi-Fi). Instead it is the marketplaces (e.g. Amazon, eBay) that are in competition. HT8's primary goal is to compete within the marketplace and win 'market share' within the marketplace. Given the transparent reviewing system, a strong incumbent in the marketplace is hard to de-throne.

In summary, HT8 success is tied to the marketplaces and their ability to win traffic. However, it is a strong incumbent (particularly in Amazon), giving it an advantage over any new / smaller players.

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