I. Sector landscape and outlook

In general, eCommerce industry refers to buying and selling goods and services over the internet, including the transmission or receipt of information with lower cost of payment systems and tax compliance. The beginning and dramatic growth of the internet have spawned claims of a new economy, and thus, the eCommerce industry has become a fundamental part with huge potential benefits, including access to government services, maintaining social relationships, conducting business and is also changing the organization of work with the emergence of the new trend of “Work from Home” due to the outburst of the COVID-19 pandemic. eCommerce industry is capturing efficiencies and increasing competitiveness among the service providers. The benefits of eCommerce industry to the economy in terms of reduced costs, higher quality and a wide variety are immense. According to the survey of the Australian Bureau of Statistics at the end of January 2020, there were approximately 22.31 million internet users in Australia, reflecting an increase of 1.2% on 2019.

Figure 1. Broadband Internet Subscribers and Volume of Downloads, June 2011 to June 2018

Source: Australian Bureau of Statistics (ABS)

Operating Model: The types of eCommerce business models are thriving and there are several types of eCommerce models available, including B2B, B2C, C2C and C2B. A B2B (Business to Business) model provides products from one business to another, for instance, Alibaba, which connects various countries with buyers around the world. The other type is B2C (Business to customers), which is more of a traditional retail model, selling its goods and services to individuals but is conducted online as opposed to a physical store. For Instance, Apple, which designs develops, manufactures, and sells electronics to consumers. With an increasing confidence of customers in the online industry, C2C sites allow customers to trade items for a small commission to the site. With this regard, one of the most prominent platforms is eBay. However, this is both B2C and C2C, where anyone can sign up and sell products via a silent auction or buy the products at a listed price. C2B is another business model which is increasing its prevalence, wherein consumer sells goods or services to businesses.

Figure 2. Operating Model

Source: Kalkine

Recent Developments Shaping the Australian eCommerce Sector

• With the deeper penetration of technology in the Australian economy, eCommerce merchants are leaping ahead of the competition.
• With the majority of households shopping online, the companies have captured leading trends to seize the attention of the customers and stay ahead of the competition. These include high discounting for their prices, marketing strategies with speedy delivery options, giving shoppers more control by managing the return preferences and offering the Buy Now Pay Later options, etc.
• The dramatic outbreak of the pandemic has fundamentally changed the consumer behavior. With the augment of this pandemic, the initial focus was on essential items that resulted in the hoarding of groceries, pharmaceuticals, hygiene items, alcohol, and toilet paper. With the clearer instructions of the Government regarding the restrictions, the online purchases shifted towards entertainment, self-improvement, DIY (Do It Yourself), comfortable and casual clothing, and gifts to connect with families and friends.
• It is difficult to model the aggregate impact of e-commerce on the Australian economy when so much uncertainty surrounds the speed of uptake and the likely extent of productivity improvements. However, the emergence of the global economy and the latest burst of globalization are correlating value creation even for the minor players.
• December 2019 became the largest month for fashion and apparel online purchases, mainly due to the popularity of the sales events, including the Black Friday and Cyber Monday. According to the Australian Industrial Report, eCommerce industry witnessed a remarkable growth over 80% on the YoY basis during FY20.

Figure 3. Evolving buyer behaviour

Source: Australian Post 2020 eCommerce Industry Report

Progressive Trends in Online Purchases with the Onset of COVID-19: 2020 has been a great year for online markets because of the social distancing measures and the restrictions placed due to the COVID-19 pandemic. It is difficult to assess the outlook of the industry post pandemic but has certainly created a new base line for growth. According to the Australian eCommerce Industry Report, previous predictions stated that the online market would account for 16-18% of the market share by 2025, but the recent growth trends reveal that the online spend is likely to be around 15% of the total retail market by the end of 2020. During the month of April 2020, the industry saw the entry of 200,000 new online shoppers with a higher purchase frequency. Social distancing measures and the risks associated with the close contact may still top the mind of some shoppers, and thereby online shopping is likely to give shoppers more choice and flexibility.

According to Aupost eCommerce Industry Report, Fashion & Apparel section in the online industry retained its status as a strong growth industry, growing 21% on the YOY basis in 2019, above the national average of 17.2%. According to Statista, largest segment of the market is fashion industry with a market volume of $9,904 million in 2020.

Figure 4. Increased Penetration of eCommerce industry

Source: Aupost eCommerce Industry Report

Bringing $2.5 billion Turnover in April: The retail sector continued to battle to keep itself ahead of the disruptive environment because of the changes in the technology, rapid market, and the shifts in the consumer behavior. Despite a historic fall in turnover during the early 2020, online sales surged during the month of April, encompassing 10% of the total headline of $24.7 billion monthly turnovers. With the macro market challenges, retailers maintained a competitive advantage by staying close to trends. They simplified products and played around with the online trend to keep up the businesses.

During 2020, the Australian Bureau of Statistics (ABS) recorded an increase of 36% in online revenue. This was mainly due to the increased fear of catching COVID-19 and preference of the customers to stay indoors. However, this curve started to flatten down because of the decline in consumers’ intent to spend. Despite the drop in the consumers spending, eCommerce sales for the month of April 2020 were up by 50% relative to sales in April 2019.

Figure 5. Australian Consumer Spending

Source: Australian Bureau of Statistics

Positive Prospects of the eCommerce Markets in Australia: eCommerce industry is booming worldwide, and the Australian eCommerce has outranked its competitors and is keeping up the pace with the largest hubs like China, the USA and the UK. As per the information published by the media sources, the Australian eCommerce market is likely to grow to ~US25.2 billion by FY21. According to Statista, the eCommerce market penetration rate will reach ~85.2% by 2021, and the number of people buying online will be around 22.0 million. However, moderations in GDP growth and softer household spends may impact domestic growth. 

According to IBISWorld, revenue from eCommerce is expected to rise by 11.1% as compared to an increase of 2.4% in the pcp. Since the majority of the products sold by the sector are produced out of the country, it is highly likely that the purchase costs of the industry may fluctuate in the current year and may lead to unstable profit margins.

To reiterate, COVID-19 pandemic is likely to benefit the eCommerce industry majorly in the segments, including groceries, homeware, but may negatively affect the sales of the discretionary products such as fashion essentials like jewelry. Over the long term, the online industry is likely to strongly grow and reach a wider audience.

Key Risks

• eCommerce sector is potentially subject to interception and tracking risk. Lack of digital certificates to verify authenticity may also pose some risks.
• The sector is also susceptible to risks related to a temporary surge in demand, brand liability, the default in payments, fraudulent activities.
• eCommerce may also face risks from the disruption in supply chains, regulatory requirements, geopolitical risks etc.
• The sector is also exposed to risks related to online security because of phishing, data errors, unprotected online services, hacking, customer disputes and chargebacks, availability of product warehousing and logistics, etc.

eCommerce industry is booming worldwide, and the Australian eCommerce has outranked its competitors and is keeping up the pace with the largest hubs. Over the long term, the online industry is likely to grow strongly and reach a wider audience. With the deeper penetration of technology in the Australian economy, eCommerce merchants are leaping ahead of the competition.

II. Investment theme and stocks under discussion (KMD, BKL, KGN and JBH)

After understanding the sector, let us now look at four companies listed on the ASX. The price potential of the companies under discussion has been analyzed based on ‘EV/Sales’ method.

 

1. ASX: KMD (Kathmandu Holdings Limited)

(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$ 794.08 Million)

Kathmandu Holdings Limited (ASX: KMD) is a retailer of clothing and equipment for travel and adventure.

Valuation

Our illustrative valuation model suggests that the stock has a potential upside of ~23% on 10 September 2020 closing price. For the said purposes, we have considered peers like Baby Bunting Group Ltd (ASX: BBN), Mosaic Brands Ltd (ASX: MOZ), and Adairs Ltd (ASX: ADH) as peers. At the same price, the stock of KMD was offering a dividend yield of ~9.95% (price correction led dividend yield increase).

 

2. ASX: BKL (Blackmores Limited)

(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$ 1.19 Billion)

Blackmores Limited (ASX: BKL) is engaged in the development, sales, and marketing of natural health products for humans and animals.

Valuation

Our illustrative valuation model suggests that the stock has a potential upside of ~19.2% on 10 September 2020 closing price. At the same price, the stock of BKL was offering a dividend yield of ~1.14%.

 

3. ASX: KGN (Kogan.com Limited)

(Recommendation: Hold, Potential Upside: High Single-Digit, Mcap: A$ 2.06 Billion)

Kogan.com Limited (ASX: KGN) manages a portfolio of retail and services businesses, that includes Kogan Retail, Kogan Marketplace, Kogan Insurance, Kogan Travel and many more businesses.

Valuation

Our illustrative valuation model suggests that the stock has a potential upside of ~8% on 10 September 2020 closing price. At the same price, the stock of KGN was offering a dividend yield of ~1.08%. For the said purposes, we have considered peers like Temple & Webster Group Ltd (ASX: TPW), Redbubble Ltd (ASX: RBL), Myer Holdings Ltd (ASX: MYR) etc. as peers.

 

4. ASX: JBH (JB Hi-Fi Limited)

(Recommendation: Expensive, Downside: lower Double-Digit, Mcap: A$ 5.41 Billion)

JB Hi-Fi Limited (ASX: JBH) is primarily engaged in the retailing of home consumer products, including consumer electronics, software, appliances, to name a few.

Valuation

Our illustrative valuation model suggests that the stock has a downside of ~10% on 10 September 2020 closing price. For the said purposes, we have considered Metcash Ltd (ASX: MTS), Coles Group Ltd (ASX: COL) and Woolworths Group Ltd (ASX: WOW) as peers. At the same price, the stock of JBH was offering a dividend yield of ~4.01%.

Note: All the recommendations and the calculations are based on the closing price of 10 September 2020. The financial information has been retrieved from the respective company’s website and Refinitiv (Thomson Reuters).

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