I. Sector Landscape

E-commerce Space: As per International Trade Administration, Australia is registered as the eleventh largest e-commerce market globally, with revenue estimates for 2020 standing at USD25.7 billion, reflecting a 15.5% YoY growth. In addition, E-commerce delivered significant economic support to the retail industry during containment measures against COVID-19.

BNPL Space: With the emergence of new business models and providers, the buy now, pay later (BNPL) sector has gone great guns, transforming the consumer payments landscape. Afterpay, Flexi Group, Zip Co, and Openpay witnessed a 55% growth in BNPL transactions and processed $10 billion of purchases in Australia and New Zealand.

Update on Retail Industry Trend and Online Sales

Retail Turnover Stabilising: As per The Australian Bureau of Statistics (ABS), total retail turnover declined marginally by 0.7% PcP in August 2021 and stood at a total level of $29,275.5 million. Food retailing and other retailing emerged as the significant contributors to total retail turnover. However, monthly turnover for clothing, footwear & personal accessory retailing declined dramatically by 15.7%, and departmental store turnover declined 10.2%.

Significant Contribution of E-commerce During Pandemic: Amidst the COVID-19 turmoil, businesses and consumers were bailed out via online market space through a swift move by retailers from brick-and-mortar to online platforms. The decline in retail turnover was partly supported by additional online sales in food and other retailing.

Impact of Lockdown Restrictions on Retail Sales: Amidst rising lockdown restrictions in Australian Capital Territory, New South Wales and Victoria, the regions assumed 19.9%, 3.5% and 3.0% decline in monthly retail turnover, respectively. With no containment restrictions for August month in South Australia, retail turnover in the region inclined 6.6%, and with minimal restrictions in Western Australia, states' retail sales hiked by 2.8%.

Figure 1: Total Retail Turnover Trend:

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

BNPL Sector Developments

Key Statistics Suggest Exponential Growth Prospects: Underpinned by the shift in consumer spending behaviour amid COVID-19, the total value of transactions increased to ~824.65 million as of 30 June 2020, up by 43% PcP. Subsequently, the number of transacting users and transactions increased by 25% and 43% PcP, respectively. Furthermore, as per additional data collected from crucial BNPL players, the proportion of transactions incurring missed payment fees declined between January 2020 and June 2020.

According to the Australian Bureau of Statistics (ABS) data, Significant Recovery Warranted in Household Spending: Spending by households continues to be in the expansionary territory with 1.1% growth in June 2021 quarter. In addition, household spending on services continues to recover, with a 1.3% and 25.4% increase in spending on hotels, cafes and restaurants, and transport services, respectively.

Figure 2: Household Spending Trend – Quarterly Growth:

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

Design and Distribution Obligations: From October 2021, The Australian Securities and Investments Commission (ASIC) has regulated design and distribution obligations that will be applied to most BNPL products. The businesses in the BNPL sector will be obligated to identify their target audience and establish a direct distribution network to target markets. BNPL providers will use industry analysis and data mining tools to gauge their target markets better and deliver efficiently.

Index Performance:

The ASX 200 Retailing (Industry Group) Index posted 10-year returns of ~+103.39% compared to ~+76.13% by the ASX 200 Index. A rapid shift in consumer preferences, growing millennials, government support on digital transformation, widening trade collaboration are factors that led to the sector gains.

Figure 3: The ASX 200 Retailing (Industry Group) outperformed the ASX 200 Index in the past ten years by astonishing ~27.26%:

Source: REFINITIV as of 30 September 2021

Key Risks and Challenges

The recent stabilisation in e-commerce activities may get cannibalised via the resurgence of traditional retail practices of brick-and-mortar. Network congestions may persist with a spike in usage across both Regional and Metropolitan areas; hence digital infrastructure may not fall relative to user demands. Gradual phase-out from containment measures poses the potential cannibalisation of online transactions with cash transactions. The sector assumes high competition due to unbounded surcharge, promoting intensive competition among payment schemes and providers. Affordability and spending must be managed as it is the key restraining factor for mass digital incorporation.

Figure 4: Key Risks and Challenges Covering E-Commerce and BNPL Sector:

Source: Analysis by Kalkine Group

Outlook

Evolution in Purchasing Habits: Increasing online shopping needs covers a broad spectrum of interests such as fashion & beauty, food & personal care, digital music, and video games. Australians have successfully accustomed themselves to digital payments and online purchasing.

A Boost to Digital Infrastructure: To strengthen regional and remote connectivity, the government has proposed to invest $84.8 million. And further, $68.5 million is allocated towards additional rounds and investment in mobile infrastructure to address network outages.

$800 Million Package: Under the Digital Business Package, the government aims to invest $800 million to enhance payment systems in Australia.

5G Network Update: As part of the Australian 5G Innovation Initiative, the government announced to invest $20 million. In NBN wholesale markets, the total number of services and total CVC capacity acquired stood at 8.4 million (up by 1.2%) and 23.0 Tbps (up by 9.2%), respectively, illustrating a favourable outlook.

II. Investment theme and stocks under discussion (ABY, SZL, KGN, BAP)

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/Sales’ multiple method.

1. ASX: ABY (Adore Beauty Group Limited)

(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$437.67 million)

ABY is a pure-play online beauty products retailer in Australia.

Valuation

Our illustrative valuation model suggests that the stock has a potential upside of 17.84% on 30 September 2021. The company might trade at some premium compared to its peers’ average EV/Sales (NTM trading multiple) given favourable market opportunities, strong fundamentals, and exponentially increasing customer base. For valuation, peers like Mydeal.ComAu Pty Ltd (ASX: MYD), Temple & Webster Group Ltd (ASX: TPW), Kogan.com Ltd (ASX: KGN), have been considered. Considering the growing top-line, online BPC market growth forecasts, resilient cash flows, valuation, and trading levels, we give a “Buy” recommendation on the stock at the current market price of $4.61, down by ~0.861%, as of 30 September 2021.

2. ASX: SZL (Sezzle Inc.)

(Recommendation: Speculative Buy, Potential Upside: Low Double-Digit, Mcap: A$1.16 billion)

SZL is a payment solutions platform catering transactions for retailers by offering short-term and interest-free instalment schemes.

Valuation

Our illustrative valuation model suggests that the stock has a potential upside of 17.81% on 30 September 2021. In addition, the company might trade at a slight premium compared to its peers’ average EV/Sales (NTM trading multiple), given a significant increase in active merchants and customers. For valuation, peers like Zip Co Ltd (ASX: Z1P), Tyro Payments Ltd (ASX: TYR), Humm Group Ltd (ASX: HUM) have been considered. Considering the improved NTM and UMS figures, near-term growth investment initiatives, and valuation, we give a “Speculative Buy” recommendation on the stock at the current market price of $5.700, as of 30 September 2021, at 12:32 PM (GMT+10), Sydney, Eastern Australia.

3. ASX: KGN (Kogan.com Ltd)

(Recommendation: Speculative Buy, Potential Upside: Low Double-Digit, Mcap: A$1.14 billion)

KGN is engaged in the operations of a portfolio of retail and service businesses.

Valuation

Our illustrative valuation model suggests that the stock has a potential upside of 16.13% on 30 September 2021. Moreover, the company might trade at a slight premium compared to its peer average EV/Sales (NTM Trading multiple), given expansion strategies and Kogan Marketspace & Exclusive Brands growth. For valuation, peers like Redbubble Ltd (ASX: RBL), Booktopia Group Ltd (ASX: BKG), Adore Beauty Group Ltd (ASX: ABY) have been considered. Considering the prudent liquidity profile, significant top-line growth, improved margins, and valuation, we give a “Speculative Buy” recommendation on the stock at the current market price of $10.810, as of 30 September 2021, at 10:54 AM (GMT+10), Sydney, Eastern Australia. In addition, the stock has delivered an annualised dividend yield of 2.74%.

4. ASX: BAP (Bapcor Ltd)

(Recommendation: Hold, Potential Upside: High Single-Digit, Mcap: A$2.48 billion)

BAP is engaged in the sale and distribution of vehicle parts, accessories, automotive equipment, etc.

Valuation

Our illustrative valuation model suggests that the stock has a potential upside of 7.69% on 30 September 2021. Moreover, the company might trade at some premium compared to its peers’ average EV/Sales (NTM trading multiple), given favourable shifts in consumer demand from public to private transport. For valuation, peers like Carbon Revolution Ltd (ASX: CBR), Apollo Tourism & Leisure Ltd (ASX: ATL), GUD Holdings Ltd (ASX: GUD) have been considered. Considering the solid interim results, prudent cash position, expansion strategies, and valuation, we give a “Hold” recommendation on the stock at the current market price of $7.57, up by ~3.556%, as of 30 September 2021. In addition, the stock has delivered an annualised dividend yield of 2.73%.

Note: All the recommendations and the calculations are based on the closing price of 30 September 2021. The financial information has been retrieved from the respective company’s website and REFINITIV.  

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.

---

Disclaimer - This report has been issued by Kalkine Pty Limited (ABN 34 154 808 312) (Australian financial services licence number 425376) (“Kalkine”) and prepared by Kalkine and its related bodies corporate authorised to provide general financial product advice. Kalkine.com.au and associated pages are published by Kalkine.

Any advice provided in this report is general advice only and does not take into account your objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your objectives, financial situation and needs before acting upon it.

There may be a Product Disclosure Statement, Information Statement or other offer document for the securities or other financial products referred to in Kalkine reports. You should obtain a copy of the relevant Product Disclosure Statement, Information Statement or offer document and consider the statement or document before making any decision about whether to acquire the security or product.

You should also seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice in this report or on the Kalkine website. Not all investments are appropriate for all people.

The information in this report and on the Kalkine website has been prepared from a wide variety of sources, which Kalkine, to the best of its knowledge and belief, considers accurate. Kalkine has made every effort to ensure the reliability of information contained in its reports, newsletters and websites. All information represents our views at the date of publication and may change without notice.

Kalkine does not guarantee the performance of, or returns on, any investment. To the extent permitted by law, Kalkine excludes all liability for any loss or damage arising from the use of this report, the Kalkine website and any information published on the Kalkine website (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine hereby limits its liability, to the extent permitted by law, to the resupply of services.

Please also read our Terms & Conditions and Financial Services Guide for further information.

On the date of publishing this report (referred to on the Kalkine website), employees and/or associates of Kalkine and its related entities do not hold interests in any of the securities or other financial products covered on the Kalkine website.

Kalkine Media Pty Ltd, an affiliate of Kalkine Pty Ltd, may have received, or be entitled to receive, financial consideration in connection with providing information about certain entity(s) covered on its website.