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Date : 12/01/2021

Kogan.com

ASX :

KGN

Market Cap : $2.09 Billion

Dividend Per Share : $0.13

Dividend Yield : 1.06 %

Buy

52 Week Range : $3.45 - $25.57

Share Price : $19.31

A very efficent business model with plenty of growth opportunities. A "Buy" for long-term investors.

Company Analysis

Kogan.com (ASX: KGN) is an eCommerce giant that is slowly bleeding into every major segment. They are turning out to be Australia’s version of Amazon. Kogan is Australia’s largest pure play online retail website. In the digital revolution that we find ourselves in the midst of, Kogan is positioned to play a very vital and key role in shaping the future of Australian eCommerce.

The giant operates under several brands in various segments. Their portfolio/business verticals consist of Retail – where the Kogan operates 20 exclusive brands, Marketplace – partners with sellers and proves an eCommerce platform, Mobile in Australia & NZ, nbn Internet, Energy, Insurance, Health, Life, Credit Cards, Home Loans, Super, Cars, Travel, Pet Insurance, Dick Smith, Matt Blatt, and the most recent acquisition of Mighty Ape.

FY2020 saw a 35.7% jump in Active Customers on the Kogan platform. As lockdowns persisted and Australians got more used to the idea of shopping from the comfort of their homes, Kogan’s customer base has grown and we expect it to continue doing so. As of October 30th, 2020, Kogan had over 2.68 million Active Customers.

The gross profit mix for FY2020 is as below:


Source: KGN

The travel vertical is the only one that has seen a decrease in performance during FY2020, which is all things considered as expected. Going forward, we will surely see a similar theme during FY2021. Kogan will also be looking to increase their exclusive brands by launching more products and diversifying further in order to maximise profits and increase margins.

Company Updates

The KGN stock has performed magnificently in 2020 with the 1-year performance coming in at 145%. The change in consumer behaviour during the pandemic accelerated the adoption of Kogan’s services. Some of the key metrics that have really boosted the company and hence the underlying value of the Kogan stock price during 2020 are:

  • The Kogan Marketplace has grown by over 70% in the second half of FY2020. This results in an increase in the active users that are onboard the Kogan platform. As more sellers are added into the ecosystem, it creates a better ecommerce experience and increases brand value and unlocks network benefits.
  • 34.1% growth in revenues from exclusive brands in H2 of FY2020. The exclusive brand gives Kogan a competitive advantage and more control over supply chains during a time when global supply chains have been disrupted.
  • Kogan First membership that unlocks a ton of customer benefits such as free shipping and the likes has scaled up massively during the year. The segment brings in not just revenues to the firm, but also ensures the sustainability of those revenues and adds to the overall growth of the Kogan platform.


Source: Tradingview.com

Kogan has also recently announced the acquisition of Mighty Ape. Mighty Ape is one of NZ’s leading online retailers and they concentrate on the gaming, toys, and other entertainment segments. The acquisition is to have cost Kogan $122.4 million that will be paid in 4 tranches and is completely funded from Kogan’s cash reserves. The acquisition will bring in over 690,000 customers to Kogan and over 895,000 subscribers.
Speaking numbers, Mighty Ape generated $120 million in revenues in FY2020, resulting in EBITDA of $9.9 million. These numbers have been consistently growing as per the report made by Kogan and we estimate synergies to increase the EBITDA margins of Mighty Ape.

Industry Analysis

Kogan has a very strong presence in Australia and has now started making aggressive in-roads into neighbouring New Zealand. Ecommerce is set to take off and the adoption has been accelerated by the pandemic.

The online retail market in New Zealand is expected to be worth over $6.5 billion by 2026. New Zealanders have historically been very favourable towards shifting to online shopping. In 2006, 37% of New Zealanders were shopping online. In 2016, this number had increased to 66%. Now, estimates suggest close to 90% of New Zealanders will be shopping online by 2026.


Source: KGN

In Australia, the online shopping industry is much larger than that of New Zealand. Current estimates suggest the industry brings in overall revenues of around $34 billion and it has been growing at over 13% annually. While this high growth rate is not sustainable in the long run given the population of Australia, it is still safe to put the industry growth to be around 10% CAGR for the next 5 years.

Australia has seen a 55.6% year-on-year increase in online shopping as of November 2020, with most of the growth coming from Victoria, South Australia, and New South Wales.

We will also witness an overall expansion of the ecommerce industry with the integration of newer technologies. For instance, the emergence of BNPL (Buy Now Pay Later) has added long-term tailwinds to the growth in ecommerce. The catalysts for growth in the industry will be led by:

  • Technological Advancements – leading to newer products/services, the delivery of new/existing services, and the synergies from the integration of different industries.
  • Increase in Operating Channels – the advent of hybrid retail models for example has added to the growth in ecommerce of late.
  • Competition – the ease of setting up an online business has resulted in increased competition that will result in products and services that will increase customer satisfaction. This will be one of the major factors that will put an end to traditional retail.
  • Expanding Margins – Profit margins are set to keep increasing due to the overall maturity that will be achieved in supply chains and increase in sales volumes.

Investment Thesis

Kogan’s share price performance so far is the talk. Backing up the very optimistic assumptions that the markets have been considering pricing the stock is the walk. So far, the firm has had a very steady financial performance. In the chart below, we can see considerable growth in all of the lines that demonstrate income sheet strength.


Source: KGN

During this period of growth, Kogan has increased their EBITDA margins from just 1.6% in FY2016 to 9.2% in FY2020. Our projections for revenues for the next 3 years are under the assumption (conservative) that the firm further increases their EBITDA margins to 11.5%. We expect Kogan to breach the $1 billion in revenues mark in 2023.

As of June 2020, Kogan has $146 million in cash on its balance sheet. However, since the acquisition of Mighty Ape, we expect the cash balance to have reduced to about $80 million – $90 million. Since they are in the retail sector, inventories will make up a large chunk of its current assets. Kogan has $112 million of inventory in its $266 million of Current Assets.

This is a very capital light business model that Kogan operates and it can be seen in its Assets and Liabilities. Kogan just has $2.4 million in debt on its balance sheet and this metric de-risk the firm in its quest for expansion and growth.

The capital structure thus shows financial flexibility and strength. Kogan is capitalized by equity up to 98.5% and by debt up to just 1.5%.

With net income for FY2020 coming in at $26.8 million, the company paid out a total of 21 cents in fully franked dividends in FY2020.

Most of Kogan’s current operational segments have been launched quite recently. During FY2020, all of Kogan’s business segments except Travel have produced positive growth rates. Kogan Mobile and Kogan Retail have already made an impact as far as market share goes. However, there is still a lot of organic growth that is to be realised from all of these segments that are in the Kogan portfolio.


Source: KNG

Recommendation

Kogan is perfectly positioned for growth. Currently, they have a very capital light business model with very low levels of debt. Kogan Marketplace, Exclusive Brands, and the entry into new business verticals will be crucial to drive further growth. Acquisitions will also play a role as we believe Kogan will aggressively enter new segments. While we will not see a dip in dividends, we do not expect a high growth rate here either given that much of the earnings will be reinvested towards operations. We issue a “Buy” recommendation for Kogan.com.

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