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Kogan shares (ASX:KGN) have been volatile in the past couple of years, but could there be some relief in sight? There are several factors that indicate that Kogan (ASX:KGN) could go higher in 2023.
Pros and cons for Kogan
The worst of the inventory and supply chain issues are well behind the company, online shopping is not going anywhere and the company has a major foothold in this market. Additionally, Kogan has been founder-led ever since its listing and has a track record of profitability prior to the inventory issues. But there are some things to say against the company, particularly competition, inflation and investor sentiment.
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Who is Kogan?
Kogan is an eCommerce retailer, founded in 2006 by Ruslan Kogan. You would likely know Kogan because of its online store. This is indeed the business’ flagship division, but it is more than that. It offers mobile phone plans, insurance, internet and financial services.
Even amidst its eCommerce store it sells its own products and exclusive Brands in addition to products made by third-party companies. Exclusive Brands now account for more than half of Kogan’s gross profit. The company also owns Mighty Ape, an ecommerce retailer in New Zealand, and the eCommerce assets of Dick Smith. And importantly, it has 31 warehouses to meet the demand of its 4.1m active shoppers.
Kogan First is growing fast
It also has a membership program called Kogan First that is designed to be similar to Amazon Prime. It has more than 400,000 members. Kogan First is the company’s opt-in premium membership service. It is similar to Amazon Prime, offering exclusive deals and perks, such as free shipping and exclusive access to Kogan First Day, one annual day where members get exclusive deals.
Kogan shares are back to Square One
After the Corona Crash, KGN shares increased by nearly 500% in just 7 months as Australian consumers swapped brick-and-mortar stores for online retail. But the shares gave up just about all of these gains over the following years.
A significant number of consumers that shifted online moved back to their regular shopping habits once stores re-opened. Kogan was left with a glut of inventory, having made future orders in anticipation that the boom would persist in the medium term and wanting to navigate supply chain disruptions.
The drying up of dividends and the selling down of shares by the company’s co-founders haven’t helped the cause either. Co-founders Ruslan Kogan and David Shafer owned 69.5% of Kogan shares in 2016 but barely own 19% between them today. In particular, the company’s namesake sold $114m when the share price was over $20.
A big loss in FY22, lower sales to start FY23
In FY22 (the 12 months to 30 June 2022), the company made a $35m statutory loss, down from a ~$3m profit in FY21. Admittedly, both figures were impacted by one-off items, such as disposals of assets and equity-based compensation expenses.
But even the adjusted NPAT doesn’t paint a rosy picture, falling from $42.9m in FY21 to a $2.9m loss in FY22. Although Kogan’s revenues were ahead of pre-COVID levels, these fell 8% to $718.5m.
A weak trading update in November 2022
A trading update provided at the company’s AGM in late November 2022 was a further blow for Kogan shares. Sales in the first four months of FY23 were 38.2% lower than in the same period 12 months before. Granted, Kogan is not the only ASX company to see online sales decline as people return to brick and mortar stores. Other examples include Best and Less (ASX:BST), Accent Group (ASX:AX1) and Mosaic Brands (ASX:MOZ).
The difference with Kogan, however, is that the latter does not have a brick and mortar network to prop up revenues.
Will 2023 be better for KGN shares?
We think the fate of KGN shares depends on the company returning to sales growth and profitability. Inventory does not appear to be a significant problem anymore, with the company having cut inventory by 39% in the last 6 months.
The company’s co-founder promised shareholders at the AGM that it would return to profitability in 2HY23, i.e. right about now. Until sales actually begin to grow, it is difficult to see investor sentiment improving enough to send shares substantially higher.
Analysts are pessimistic about Kogan shares for 2023, but bullish thereafter
There are 9 analysts covering Kogan and the mean 12-month target price is $4.45 – a 2% discount to the $4.54 share price on 31 January 2023. Granted, there is significant divergence between analysts’ targets, the highest is $10.70 and the lowest is $2.96.
Consensus estimates for FY23 are for $602.3m in revenue, $9.1m in EBITDA and negative EPS of 0.19c on a normalised basis.
FY24 is looking good
These estimates mean the company is trading at a 53.1x EV/EBITDA multiple for FY23. EPS would be improved from negative 0.33 in FY22, although revenue and EBITDA would be down 16% and 52% respectively. But we really should be looking at the next financial year that starts in 5 months.
For FY24, analysts are more optimistic. They expect $640.3m in revenue, up 6.3%, $41.2m in EBITDA, up 353% and EPS of $0.10. Based on these numbers, KGN is trading at an EV/EBITDA of 11.8x and a P/E of 41.2x. Given the expected strong EBITDA growth in FY24, we believe these multiples are actually quite attractive!
We need to see a turn in sales … from a decline to bottoming out to growth again
If the company releases interim trading updates in the next few months that indicate the sales decline is bottoming out, or that sales are even starting to grow again, KGN shares could be worth a closer look pretty soon!
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