The hard thing about something like Kogan is that every time you get some disappointing news, and the price plunges lower, you can rationalise it by saying that the news, while negative, is NOW more than reflected in the price, and that none of the issues are structural in nature. ie. they are short term issues that distract from a much more positive longer-term trend.
That might be true, and maybe this latest decline will prove to be a wonderful buying opportunity for longer term investors.
After all, revenues have more or less doubled in the last few years and despite the recent dip in quarterly gross sales, the business has grown sales by almost 20% per annum since Q3 FY20 (and maybe that's a fair period to benchmark things given the covid bump that was experienced in the prior year).
On the other hand, a lot of categories are going backwards -- even over a 2 year annualised basis (eg Advertising, mobile and third party brands). And if you strip out the Mighty Ape acquisition, gross sales have only grown at an annualised rate of 11% since Q3FY20.
On top of that, costs have increased substantially, such that the business is now loss making on an adjusted EBITDA basis. To be fair, a lot of these investments may not have yet had time to bear fruit, but it does underscore concerns over what operating margins look like at scale -- especially in the face of intense competition (Amazon), rising costs pressures and stagnating wages.
Let's annualise the latest quarterly gross sales numbers and apply an *underlying* net margin of 2%. That gives us NPAT of $21m, which puts shares on a PE of roughly 21. I'm not sure that's necessarily cheap for a business that is struggling to find growth (active customers were up only 3.6% yoy), especially in a rising interest rate environment.
Of course, perhaps they can resume sales growth and return to much healthier net margins. For example, we could assume FY gross sales of $1280m if we pro-rata the first 9 months of the year, and apply a 3.6% net margin (what they got on an underlying basis FY21). That'd give a FY *normalised* NPAT of $46m, and that would put shares on a forward PE of less than 10. Cheap!
I'm just not convinced they can deliver solid organic growth and achieve decent margins. Even if you assume 10% top line growth for the next few years, a 2% net margin and a PE of 16 -- you get a target price of just over $5, and that's an annual return of less than 10% from current prices.
This is not a business that is going to zero, far from it. I just find it hard to gain any real conviction and think the best days of growth are over. I think shares are, at best, around fair value.
I could well be wrong, and it's worth remembering that profit assumptions change a LOT if you apply a higher margin (eg if you assume a 3% net margin instead of a 2% one in my example above, you have a FY25 target price of $7.64! -- all else being equal)
So i get the Bull case, but it's just in the too hard basket for me.
You can read the recent quarterly update here
I think Kogan -- the company and the founder -- are both very impressive. Founded only 15 years ago, it now does over $1 billion in annual gross sales. Moreover, since listing, that growth has been largely self-funded, while still delivering a decent profit (and dividend!) along the way.
Despite this growth, Kogan reckons it has around 2.7% share of online retail. Indeed, online retail as a category is only 13% of total retail trade is Australia -- and growing fast.
In the latest year it suffered from some stock provisions, and increased logistics costs due to covid, and there were some one off costs with stock compensation and associated payments, but on a 'normalised' basis this is a business that has grown NPAT 3-fold in 3 years.
And on adjusted EPS numbers the business is trading on a PE of ~30. That doesn't sound too bad, given the growth and market opportunity. It's surely a lot better than the PE of 60 it was last year.
But i worry if it may be less of a bargain than it seems.
First off, if we're going to 'adjust' some costs due to covid, we should surely adjust for some of the benefit too. Covid has helped accelerate online sales growth and no doubt brought some spending forward too. Revenue in FY21 was up 56%! It's hard to know what growth would have been like in the absense of covid, but it's something to keep in mind when looking at the PE.
But the real question for me is to what extent Kogan can keep growing. At maturity -- which is doubtless still a ways off -- this is a low margin, volume sensitive retailer. It'd likely trade on a PE multiple of much closer to 15 (more mature retailers like JBH and HVN are both ~12 at present).
And it's facing off against one of the most powerful businesses on the planet.
Amazon, which entered Australia in 2017 (10 years ofter kogan), and already has around $1b in annual revenue -- roughly 20% more than Kogan -- and Morningstar have them reaching $9b in revenue in Australia by 2025. That would be about 20% of all online trade.
There's no guarantee in that forecast, and I definitely think there's room for both players. Even if Kogan doesnt increase it's market share, and instead only manages to hold steady at 2.7% market share -- the market itself is growing pretty fast.
But Amazon will certainly cap Kogan's prcing power. History has shown that Amazon will happily cede margin if it means gaining market share. And huge logistics investments from Amazon will require kogan to keep up if it hopes to match Amazon on delivery times.
It's all very hard to predict, and i'd want a pretty big margin of safety before I bought. See my valuation.
Kogan has released trading details for July (here).
This shows an acceleration from the strong gains reported for June (here). Very impressive.
Based on unaudited figures released to date, the company is trading on a EV/EBITDA ratio of approx 36x. (using adjusted EBITDA of 49.7m for FY20 -- a 32%-odd imporvement on FY19). That likely translates into a PE of roughly 65 or so.
The current share price is probably about fair if you assume this annual pace of growth can be sustained in the coming years. The question is how much of this is due to the covid-induced acceleration to online shopping; is it a one-off sugar hit, or something more sustainable?
I'm also mindful that the macro conditions still appear challenging -- especially once government support payments start to roll back. This is discretionary retail after all.
It is worth noting that Kogan has fared extremely well in the face of Amazon's launch into Oz -- something that I was worried would crimp their growth. Credit where it's due.
I'm not a holder, and not inclined to be at the current price -- i'd want a wider margin of safety.
Preliminary Results were released today -- 23/7/19
As for financials:
At the current price ($5.20), Kogan has an enterprise value of $461.3m which is about 14 times FY19 EBITDA
Based on similar Interest Tax Depreciation & Amortisation costs (as a percentage), NPAT should be roughly ~17.6m, or 18.8cps, shares are on a forward PE of ~28 times.
Full announcement here
Kogan released a hell of a trading update today (17/1/19), one that sent shares up a massive 22%.
The company reported a record xmas trading period, with active customer numbers surging more than 32% year on year.
Total (unaudited) revenue growth was 9.7% stronger compared with previous corresponding period, but a poor result from Apple products and changes to GST laws mask much stronger growth within Exclusive brands segment (up 23%) and Partner Brands (up 92%). Excluding Apple products, Global brands segment saw a 8.5% rise in revenues.
Meanwhile, gross margins appear to have recovered, and Kogan mobile customers grew by 75%.
Read the full announcement here
Kogan has a very impressive history and is led by a capable founder. I think it will continue to grow (on average) in the years ahead, but...
Even under optimistic scenarios, I find it incredibly difficult to justify the current market valuation.
For example, let's assume the business grows sales at ~30% per annum through to 2022, giving it >$1b in revenue. Let's also assume it improves net margins (currently at 2.4%) to 4%. Finally, let's assume that even after all that growth, it can still attract a PE of 20 in 2022.
If we demand a 10% average annual capital gain between then and now, that gives a 'fair value' of $5.41.
Let's look at it another way..
Kogan currently has about 2.4% of the online market, which is approx $17b
Let's say the online market grows at 20% per year, and Kogan increases its market share to 4% by 2022 (presently, it's about 1.8%). We'll also assume it generates a 4% net margin at that time and sports a PE of 20.
Again demanding a 10% average annual capital return, that gives a share price of $8.52
So my view is that even under very robust assumptions, the share price still looks very much overpriced.
Because Kogan has been moving into a lot of new areas, leveraging off it's existing platform and generating high incremental earnings, it could potentially exceed what I have (generously) assumed above, especially if it can continue to attract high market multiples, but this one really is priced for perfection...