Company Overview: Adore Beauty Group Limited (ASX: ABY) operates an online marketplace for beauty and personal care products in Australia. Its product categories include skincare, make-up, hair care, fragrance, and wellness, among others. The company was introduced in 2000 as Australia’s first beauty-centered e-commerce website with a broad and diverse portfolio of ~260 brands and 10,800 products.

ABY Details

ABY Rides on Increasing Website Users & Strong Fundamentals: The company started FY21 on a strong note, delivering record revenue and profitability, highlighting the strength of ABY’s underlying business, and market-leading position. The company remains on track to capitalise on the structural shift to online channels, rapidly adding new customers, and offering ~260 leading brands combined with an exceptional customer experience.

Key Findings from FY21 Results:

• Rise in Revenues: In FY21, the company’s revenue soared 48% on pcp and came in at $179.3 million. The growth was aided by an increase in active customers.
• Robust Active Customers: In FY21, active customers went up by 39% year over year and came in at 818k, driven by high customer retention and increasing Average Order Value (AOV). Notably, in FY21, the company acquired 457,552 new customers. Annual revenue per active customer in FY21 went up by 7% on pcp.
• Increase in Underlying Net Profit & EBITDA: Net profit after tax stood at $4.2 million, representing a rise of by 64% year over year. The company recorded EPS of 0.92 cents in FY21, as compared to a loss of 1.93 cents recorded in FY20. In FY21, EBITDA stood at $7.6 million, depicting an increase of 53% year over year.
• Gross Margin Expansion: In FY21, the company’s gross profit margin expanded 1.2 percentage points year over year and came in at 33.1%, underpinned by product margin expansion.
• Increase in Downloads: In FY21, the company attained a best-in-class level of customer satisfaction with a Google Review rating of 4.9 out of 5. The company also expanded its owned marketing channels, with Adore Beauty podcast downloads increasing a whopping 273% on a year over year basis.
• Product Launch: ABY unveiled a native iOS and Android mobile app in FY21, thus aiding the company to drive higher user engagement. ABY also launched a loyalty program with strong member uptake, consisting more than 95% of the top customer tier.
• Cash & Debt Position: The company exited FY21 with a cash balance of $29 million, up ~75% on pcp. The company has a strong balance sheet with almost negligible debt, thus helping ABY to attain its long-term objectives, and pursue strategic acquisitions.

The below picture depicts a continuous growth trajectory in ABY’s website users since 2013.

Trend in Website Users; Analysis by Kalkine Group

Key Metrics: For FY21, the company reported an EBITDA margin of 3.9%, higher than the year-ago figure of 3.4%. In FY21, the company recorded cash cycle days of 1.5 compared to the FY20 figure of 2.6 days.

Growth, Profitability and Liquidity Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 75.33% of the total shareholdings, while the top 4 constitute the maximum holding. QPE Growth, LP Limited held the maximum number of shares with a percentage holding of 32.49%, followed by Morris (Katy Ann) holding 10.83%, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis:

• Loss of key Customers: The company’s financial performance might get impacted by caution in buying behaviour. Also, change in customer preference and supplier concentration risk add to the woes.
• COVID-19 Led Uncertainties: The company is exposed to the prevailing global uncertainties related to COVID-19 and other geopolitical tensions.
• Stiff Competition: The company is exposed to stiff rivalry from competitors developing similar product lines and services.

Outlook: The company remains on track to implement a robust growth strategy to strengthen its online market leadership position with disciplined investments in the mobile app, loyalty programs, and pursue adjacent expansion opportunities. The company will continue to pursue investments in marketing and ad spend to spur sales. It will invest in private labelling and new sales programs for online reach. ABY expects to maintain an EBITDA margin between 2-4% in the short to medium term. In the long run, the company expects to increase operating leverage and deliver further EBITDA margin expansion.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative) 

Source: Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: The stock of the company has been corrected by ~3.53% in the past one-month. Currently, the stock is trading below the average of its 52-week high and low levels of $7.42 and $3.31, respectively. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight premium as compared to its peers’ average, considering its rise in top line, decent liquidity position, an encouraging outlook, rise in website users, robust customer base, product launches, etc. For the purpose of valuation, peers such as Temple & Webster Group Ltd (ASX: TPW), Kogan.com Ltd (ASX: KGN), Breville Group Ltd. (ASX: BRG) have been considered. Considering decent liquidity position, higher revenue base, positive outlook, increase in customer base, current trading levels, and valuation, we recommend a ‘Buy’ rating on the stock at the current market price of $4.820 as on 3 September 2021, 10:30 AM (GMT+10), Sydney, Eastern Australia.

ABY Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above. 

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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