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Kogan shares (ASX:KGN) have been volatile in the past couple of years, but is a better future ahead of it? At first glance, it may not appear a good pick given softening consumer demand, intense competition and negative earnings right now. But the company appears in better shape when you take a deeper dive – arguably even better than it was during the pandemic.
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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.
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 dropped back to Square One, but are recovering
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 2 years as illustrated in the chart.
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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 built up its inventory in anticipation that the boom would persist in the medium term and wanting to avoid 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.
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 didn’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.
Things are getting better
Kogan’s 1HY23 results may not appear good at first glance. The bottom line (NPAT) was still in negative territory and revenue was down from 34.3% compared to 12 months ago. However, there were some positive signs, including returning to EBITDA profitability in January 2023 (and going on to record 3 straight EBITDA profitable months). It had reduced the excess inventory from $159.9m to $98.3m. Net cash grew to $74m. And some of its verticals (particularly mobile and credit cards) saw good growth.
The company may seem like another Amazon – an online shop that just sells stuff. In one sense Kogan is, but it has diversified its revenue sources in generating income from subscription fees and commissions from third party sellers. It has over 400,000 people paying $100 per year to be Kogan First subscribers, a number that has been growing, even as it increased prices. And although the pandemic is long behind us, it is easy to forget that Kogan First was growing even before the pandemic at 12% a year. Kogan was consistently outperforming the market with 20% sales growth per year.
You might be wondering how a relatively small, local eCommerce company can compete with global giant Amazon. Well, Kogan is in a different space than Amazon, because they are in different product categories. Amazon tends to sell perishables and low-cost apparel products, while Kogan sells consumer electronics and home furnishings. The company has simplified its supply chain so it obtains the gods straight from the manufacturer.
FY24 is looking good
Although the company’s FY23 results will be down from FY22, FY24 could be more positive. There are 8 analysts covering Kogan and they expect $558.8m in revenue (up 6%), $39.1m in EBITDA (up 389%) and 9c EPS (up from -10c) in FY24. In FY25, they expect $608.5m in revenue (up 9%), $45.3m in EBITDA (up 16%) and 23c EPS (up 155%).
The company is trading at 10.8x EV/EBITDA and 50.6x P/E for FY24 and 9.3x EV/EBITDA and 19.7x P/E for FY25. The P/E multiples may seem high, but not when you consider its PEG multiple for FY25 is barely 0.12x. Kogan’s EV/EBITDA-to-EBITDA-growth metric looks good too at just 0.2x for FY24.
We think Kogan is worth $6.77 – a ~54% premium to the current share price. We come to this valuation using a 17x EV/EBITDA multiple for FY24 (utilising a basket of 10 of its peers, including large retailers and mid cap eCommerce players).
Kogan is one for the watchlist
We think investors should take a look at Kogan, but hold off buying until the FY23 numbers come out. Specifically, we want to know if the revenue decline we saw through 1HY23 is turning a corner, i.e. closer to zero in 2HY23 through June, or maybe even slightly positive.
Nonetheless, we think Kogan is a company investors should watch closely. It has been through a volatile 3 year period, but we think it is set for a more stable future with consistent growth just like that which it endured prior to the pandemic.
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