I. Sector Landscape and Outlook

The retail industry houses traditional brick-and-mortar retail store operators as well as online retailers offering a wide range of products in electrical goods, clothing and footwear, food and grocery, building and garden supplies, pharmaceuticals, and cosmetics, among several others. The retail industry is one of the largest employers in Australia with 10.1% of the total labour force were employed as of November 2020, according to the Australian Bureau of Statistics. With high per capita income and the highest average wealth per adult, the retail sector in Australia contributed ~4.3% of GDP to $20.3 billion in the September 2020 quarter.

Australia has the highest urban population with ~90% of the population living in urban areas of Sydney, Melbourne, Adelaide, Brisbane, and Perth. As mentioned by the Shopping Centre Council of Australia, there were ~1,630 shopping centres in Australia that exceeded 1,000 square meters of gross lettable area. These shopping centres equate approx. 106 square meters of lettable area per 100 people, representing third highest in the world next to USA and Canada.

Figure 1. Square Meters of Shopping Centres Per 100 People:

Data Source: Shopping Centre Council of Australia, Chart Created by Kalkine Group

Retail turnover showed a healthy growth of 4.9% on an annualized basis over the past three years to reach $30.37 billion (on a seasonally adjusted basis) in December 2020, according to the Australian Bureau of Statistics. This was contributed by increasing urbanization, changes in consumer preferences, and entry of several foreign brands and retailers. Spend on essentials surged while discretionary categories took the back seat during the pandemic.

The re-opening of Victoria boosted retail sales in November 2020 but receded in the subsequent months. A cluster in Northern Beaches and local community lockdowns impacted spending during Christmas. Food retailing surged during the pandemic following the increase in consumption. Increased footfalls in clothing, footwear, and accessories retailing in addition to electronic goods benefited from Black Friday sales during November 2020. Cafes and takeaways, and household goods retailing posted the strongest growth in December 2020 over the prior year. In the recent data, retail turnover improved by 0.6% in January 2021 over the prior year.

Figure 2. Food Retailing Representing Larger Share of Retailing:

Data Source:  Australian Bureau of Statistics, Chart Created by Kalkine Group

In the wake of border closures and restrictions in movement during the pandemic, large format store operators are increasingly looking to enter regional cities with smaller store formats. This shifted the demand for retail spaces in sub-urban such as Tasmania. In the latest release, retail sales showed improvement across states. Victoria and NSW led the rise in the supermarkets sales after restrictions impacted Christmas celebrations in December 2020. Three-day lockdown at Brisbane impacted clothing, footwear, and personal accessories retailing in January 2021.

Figure 3. Shift to Regional Shopping Trend Impacted Retail Turnover at Capital Cities:

The pandemic shifted consumer buying trends with increased adoption of online channels and new digital payment modes. Online shopping witnessed unprecedented growth last year with purchases surged ~41% for the year till April 2020 driven by social distancing norms and stay-at-home protocol, while Households shopping online touched 5.2 million according to the Australia Post. The share of online retailing reached 12.6% for twelve months to December 2020. More than 200,000 new shoppers entered the market and over one-third of new shoppers made multiple purchases during April 2020.

During the initial phase, consumers increasingly bought essentials like groceries, pharmaceuticals, and hygiene items given the panic situation. As Australians settled-in, online shopping shifted to entertainment, DIY, casual clothing, and gifts. Wine and liquor, and department store purchasing lead the sales, particularly during Easter. Australia Post facilitated ~$2.4 billion e-commerce transactions during the three months to May 2020 with the number of parcel deliveries increased by 26 million compared to the same period last year. According to NAB, Australians spent ~$44.18 billion on online retail for twelve months ending to December 2020, this is about 44.4% higher than the previous comparable period.

Figure 4. Surge in Online Sales Driven by The Social Distancing and Restrictions:

Data Source:  Australian Bureau of Statistics, Analysis by Kalkine Group

According to the Australia Post, ~90% of online purchases is being made by shoppers who live in major cities and inner regional areas in April 2020. Victoria stood the highest with the record growth of 111% (on a YoY basis) in April 2020 vs. 19.9% in full-year 2019. E-commerce reached very remote places in Australia with ‘last-mile’ delivery reporting a growth of 56% YoY as compared to ~11% in full-year 2019.

Figure 5. Regional Areas and Very Remote Areas Hit the Podium:

Data Source: Australia Post, Analysis by Kalkine Group

Index Performance:

The ASX 200 Real Estate (Industry Group) generated returns of ~+18.57% in the past one year as compared to ~-0.36% by the ASX 200 Index. Increasing share of online shopping, wider adoption of alternative payment methods, and strong recovery of retailers post-re-opening of Victoria are some of the growth enablers.

Figure 6: ASX 200 Retailing (Industry Group) outperformed ASX 200 Index by ~18.93% over the past one year

Source: Refinitiv (Thomson Reuters) as on the close of 25 February 2021

Key Risks and Challenges:

The retail sector is largely dependent on macro-economic developments. Unemployment rates although declined but still appear on the higher side and with weak wage growth, spending on discretionary is unlikely to show improvement. In addition, high household savings due to the panic created by the COVID-19 to have a lingering effect on spending. Higher household debt and lower prospects for jobs and wage growth may put pressure on debit card repayments and severely affect discretionary spending. The Australian Securities and Investments Commission mentioned that one in five customers in the last 12 months to November 2020 had missed their payments under the BNPL scheme or late paying their bills. The retail sector may experience headwinds from the expiration of the JobsKeeper program in March 2021 impacting household spending.

Figure 7. Key Risks in The Retail Sector:

Sources: Analysis by Kalkine Group

Outlook:

Global online retailing is expected to reach $3.43 trillion by 2023, taking the share of 17% of total retailing according to the Australia Post. Australia is well-positioned to benefit from it given the rising share of millennials demographics, increasing digitization, and adoption of alternative payment modes. The usage of Buy-Now-Pay-Later (BNPL) accelerated as there were no service fees, unlike a credit card. Millennials have increasingly relied upon such schemes. According to the Reserve Bank of Australia, payment through alternative platforms saw an increase of 76% in transaction value in November 2020 over the prior year. Digital behaviours adopted during the pandemic are expected to endure as consumers realise greater purchasing efficiency. The Morrison government plans to strengthen the digital technologies with the digital business package announced in the 2020-21 budget with an investment of ~$800 million. In a survey by the Australian Bureau of Statistics dated December 2020, a handful of retail companies are expecting positive monthly revenues over the next month. In a separate release, retail companies have shown higher capex spend predominantly in store expansions.

II. Investment theme and stocks under discussion (TPW, KMD KGN, HVN)

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 analysed based on the ‘EV/EBITDA’ method.

1. ASX: TPW (Temple & Webster Group Ltd.)

(Recommendation: Buy, Potential Upside: Low Double Digit, Mcap: A$1.23 Billion)

Temple & Webster Group Limited operates an online shopping club in Australia. The company provides its members with access to furniture, homewares, home decor, arts, gifts, and lifestyle products.

                                                                              

Valuation

Our illustrative valuation model suggests that stock has a potential upside of 21.43% on 25 February 2021. We believe that the stock might trade at a premium as compared to its peer average EV/EBITDA (NTM Trading multiple) considering its leadership position in online furniture and homewares business in Australia. TPW has significant scale with 500+ suppliers in 211 product categories with expanded reach to Indonesia, India, and Europe. For the said purposes, we have taken peers such as Atomos Ltd. (ASX: AMS), Adore Beauty Group Ltd. (ASX: ABY), Betmakers Technology Group Ltd. (ASX: BET).

2. ASX: KMD (Kathmandu Holdings Limited)

(Recommendation: Buy, Potential Upside: Low Double Digit, Mcap: A$843.71 Million)

Kathmandu Holdings Limited provides clothing, and equipment for outdoor, lifestyle and sports under Rip Curl, Oboz, and Kathmandu brands.

  

Valuation

Our illustrative valuation model suggests that stock has a potential upside of 23.85% on 25 February 2021. We believe that the stock might trade at a slight discount as compared to its peer median EV/EBITDA (NTM Trading multiple) as its lifestyle and outdoor products are highly discretionary and influenced by macro-economic headwinds. The company’s Kathmandu brands were yet to show pick-up in sales during H1 FY21. For the said purposes, we have taken peers such as GUD Holdings Ltd. (ASX: GUD), Wesfarmers Ltd. (ASX: WES), Harvey Norman Holdings Ltd. (ASX: HVN).

3. ASX: KGN (Kogan.com Ltd.)

 (Recommendation: Hold, Potential Upside: Low Double Digit, Mcap: A$1.68 Billion)

Kogan.com Limited runs a portfolio of retail and service businesses comprising Kogan Marketplace, Kogan Retail, Mighty Ape, and a few others. It sells products under third-party brands and Kogan.com’s exclusive brands.

Valuation

Our illustrative valuation model suggests that stock has a potential upside of 17.64% on 25 February 2021. We believe that the stock might trade at a slight discount as compared to its peer median EV/EBITDA (NTM Trading multiple) citing the general slowdown in the economy may impact the discretionary nature of its products. The company’s EBITDA margin is lower than industry median reflecting the company is to benefit from the scale economies and operational efficiencies.  For the said purposes, we have taken peers such as ARB Corp Ltd. (ASX: ARB), City Chic Collective Ltd. (ASX: CCX), Breville Group Ltd. (ASX: BRG). The stock delivered an annualized dividend yield of 1.32%.

4. ASX: HVN (Harvey Norman Holdings Limited)

(Recommendation: Hold, Potential Upside: Low Double Digit, Mcap: A$6.61 Billion)

Harvey Norman Holdings Limited operates stores under the name "Harvey Norman Discounts", selling homewares and electrical goods. The company also provides advisory and advertising to the franchises.

Valuation

Our illustrative valuation model suggests that stock has a potential upside of 17.41% on 25 February 2021. We believe that the stock might trade at a slight discount as compared to its peer average EV/EBITDA (NTM Trading multiple) as the company’s property rental business to impact from low rentals and increasing vacancy rates. The commercial office CBT market is yet to show momentum. For the said purposes, we have taken peers such as Adairs Ltd. (ASX: ADH), Nick Scali Ltd. (ASX: NCK), Accent Group Ltd. (ASX: AX1). The stock delivered annualized dividend yield of 5.64%.

Note: All the recommendations and the calculations are based on the closing price of 25 February 2021. The financial information has been retrieved from the respective company’s website and Refinitiv (Thomson Reuters).

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Disclaimer  

 

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