I. Sector Landscape and Outlook

As per International Trade Administration, Australia is registered as the eleventh largest e-commerce market globally, with revenue projected to reach US$32.3 billion by 2024, up from US $25.7 billion estimated in 2020. E-commerce delivered significant economic support to the retail industry during containment measures against COVID-19. Today, e-commerce has turned into an effective channel for Australian exporters with accessibility in global markets.

Key Growth Drivers:

Household Income Outpace Pre-COVID Levels: Amidst COVID-19 challenges and uncertainties of systematic global risks, the Australian economy registered a 1.8% QoQ and a 1.1% YoY uplift in GDP for March 2021 quarter. For the same period, real net national disposable income and GDP per capita surged by 6.1% YoY (3.4% QoQ) and 0.8% YoY (1.7% QoQ). On the other hand, the household savings ratio made a sequential fall in March 2021 quarter with 11.6% from the highs of 22.0% posted in June 2020 due to progressive consumer sentiments and a drop in the unemployment rate.

According to the data by the Australian Bureau of Statistics (ABS), Significant Recovery Warranted in Household Spending: Spending by households continues to be in the expansionary territory with 1.2% growth in March 2021 quarter. However, spending remained below the pre-pandemic levels. In addition, Australians spent more on services than on goods, with a 2.4% increase in spending on hotels, cafes and restaurants, and transport services.

Record High Private Investment: In consequence of prudent government initiatives to restore business confidence, private investments of the March 2021 quarter assumed a significant uptick of 5.3% QoQ and 3.6% YoY, registering the most robust growth since September 2017 quarter. Improved business investments were signaled by an 11.6% increase in machinery and equipment, and robust housing investments were signaled by a 6.4% surge in dwelling investment in line with soaring construction activities.

Figure 1: Critical Recovery of Household Consumption and Savings from COVID-19 Impact:

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

Update on Retail Industry Trend and Online Sales

Considerable Growth in Retail Industry as Economy Phases Out of COVID-19 Restrictions: As per ABS, total retail turnover surged by 7.7% PcP in May 2021 and stood at a total level of $31,158.3 million. Food retailing and café, restaurants & takeaway food services emerged as the significant contributors of total retail turnover. Household goods retailing, which nosedived to $5,363.4 million in October 2020 (containment period), stabilizes to $5,569.1 million in May 2021.

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. During the pandemic, online sales witnessed exponential growth from ~$1,852 million in January 2020 to ~$2,791 million in April 2020, a surge of 50.7%. Conversely, with the onset of COVID-19 related restrictions, total retail sales declined radically from $30,033 million to $24,817 million, a monthly decay of 17.4%.

Growth Stabilization in Online Sales: With the traditional retail practices reaching normalcy and containment measures getting diluted, a cannibalization effect can be seen with online sales entering a stabilized territory. In May 2021, sales from e-commerce activities of food and non-food declined to $778.8 million from $880.8 million and $2,004.8 million to $1,967.2 million on a sequential basis, respectively. In May 2021, the pure-play retailers accounted for 3.0% of total sales and 33.1% of online sales, while over time, the split between pure-play and omnichannel retailers remained stable.

Figure 2: Impact of COVID-19 and Traditional Retail on Online Sales:

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

Index Performance:

The ASX 200 Retailing (Industry Group) Index posted 5-year returns of ~51.21% as compared to ~+33.20% by the ASX 200 Index. Rapid shift in consumer preferences, growing millennials, government support on digital transformation, widening trade collaboration are some of the factors that led to the sector gains.

Figure 3: The ASX 200 Retailing (Industry Group) outperformed the ASX 200 Index in the past five years by astonishing ~18.01%:

Source: REFINITIV as on 29 July 2021

Key Risks and Challenges:

Possibilities of an increase in unemployment rates may sustain with the gradual fading of government support via Jobkeeper policy which may directly impact household spending. The recent stabilization in e-commerce activities may get cannibalized 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. Affordability and spending must be managed as it is the key restraining factor for mass digital incorporation. Cybercrime rates may skyrocket with compromised data protection infrastructure possibilities, which may negatively impact the e-commerce sector as a whole.

Figure 4: Key Risks and Challenges in the E-Commerce Sector:

Source: Analysis by Kalkine Group

Outlook

Figure 5: Outlook Framework

Source: Analysis by Kalkine Group

Evolution in Purchasing Habits: Increasing online shopping covers wide 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.

COVID-19 drove appetite for online streaming and entertainment: Lockdowns in the country culminated substantial growth for broadcast video on demand (BVOD) and streaming video on demand (SVOD), which are set to grow by 12.9%, with estimated revenue of $501 million and 16.2% with estimated revenue of $2.3 billion in 2024, respectively.

Investments in 5G Network Infrastructure: The Australian government announced a $20 million Australian 5G Innovation Initiative, promoting the value of 5G networks. In NBN wholesale markets, the total number of services and total CVC capacity acquired stood at 8.3 million (up by 2.1%) and 21.0 Tbps (up by 6.3%), respectively, illustrating a favourable outlook.

Government Initiatives on Digital Infrastructure Front: For the Budget FY22, the government aimed at improving digital facilities in regional and remote Australia via an $84.8 million investment to expand the Regional Connectivity Program. A further $68.5 million is allocated towards additional rounds of the aforementioned program and Mobile Black Spot Program to address network outages.

Australian Exporters are Navigating Opportunities to Expand E-commerce Footprint in India: Australian food and FMCG exporters have sought growth opportunities in India via online sales to testbed their products at a nominal investment.

II. Investment theme and stocks under discussion (BKL, KGN, HVN, 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 methods.

1. ASX: BKL (Blackmores Limited)

(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$1.42 billion)

BKL is engaged in the development, sales, and marketing of natural health products for humans and animals.

Valuation

Our illustrative valuation model suggests that stock has a potential upside of 18.51% on 29 July 2021. Moreover, we believe that the stock might trade at some premium compared to its peer average EV/Sales (NTM trading multiple), given substantial growth and footprint in the international segment. For the said purposes, we have taken peers such as BWX Ltd (ASX: BWX), Harvey Norman Holdings Ltd (ASX: HVN), Wesfarmers Ltd (ASX: WES), to name a few. Therefore, considering the cost-saving measures, growth in the international segment, fully paid debt obligations, and valuation, we give a “Buy” recommendation on the stock at the current market price of $73.040, down by ~1.057% on 29 July 2021. In addition, the stock has delivered an annualised dividend yield of 0.39%.

2. ASX: KGN (Kogan.com Ltd)

(Recommendation: Speculative Buy, Potential Upside: Low Double-Digit, Mcap: A$1.11 billion)

KGN is engaged in the operations of a portfolio of retail and service businesses. It offers products under exclusive brands and products sourced from third-parties.

Valuation

Our illustrative valuation model suggests that stock has a potential upside of 21.11% on 29 July 2021. Moreover, we believe that the stock might trade at a slight premium compared to its peer average EV/Sales (NTM trading multiple), given expansion strategies and growth in Kogan Marketspace & Exclusive Brands. For the said purposes, we have taken peers such as Redbubble Ltd (ASX: RBL), Temple & Webster Group Ltd (ASX: TPW), Harvey Norman Holdings Ltd (ASX: HVN), to name a few. 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 $10.385, as on 29 July 2021, 3:25 PM (GMT+10), Sydney, Eastern Australia. In addition, the stock has delivered an annualised dividend yield of 2.81%.

 3. ASX: HVN (Harvey Norman Holdings Limited)

(Recommendation: Hold, Potential Upside: Low Double-Digit, Mcap: A$7.03 billion)

HVN operates integrated retail, franchise, property, and digital enterprise.

 Valuation

Our illustrative valuation model suggests that stock has a potential upside of 12.32% on 29 July 2021. However, we believe that the stock might trade at slight discount compared to its peer average EV/Sales (NTM trading multiple) given high competition from pure-play players. For the said purposes, we have taken peers such as Wesfarmers Ltd (ASX: WES), Accent Group Ltd (ASX: AX1), Nick Scali Ltd (ASX: NCK), to name a few. Considering the robust top-line, improved operational efficiency with growth in franchisee segment, improved liquidity position, and valuation, we give a “Hold” recommendation on the stock at the current market price of $5.730, up by ~1.415% on 29 July 2021. In addition, the stock has delivered an annualised dividend yield of 6.63%.

4. ASX: BAP (Bapcor Ltd)

(Recommendation: Hold, Potential Upside: Low Double-Digit, Mcap: A$2.75 billion)

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

Valuation

Our illustrative valuation model suggests that stock has a potential upside of 10.48% on 29 July 2021. Moreover, we believe that the stock might trade at slight premium compared to its peer average EV/Sales (NTM trading multiple), given favourable shifts in consumer demand from public to private transport. For the said purposes, we have taken peers such as Autosports Group Ltd (ASX: ASG), Eagers Automotive Ltd (ASX: APE), GUD Holdings Ltd (ASX: GUD), to name a few. 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 $8.170, up by ~0.492% on 29 July 2021. In addition, the stock has delivered an annualised dividend yield of 2.26%.

Note: All the recommendations and the calculations are based on the closing price of 29 July 2021. The financial information has been retrieved from the respective company’s website and REFINITIV.  

Investment decisions 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.

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