With the re-opening of the economy, household consumption rebounded in Sep’20 quarter with 7.9% growth on QoQ basis. As containment measures eased, Australians increasingly spent on recreation activities, hotels, cafes, and restaurants during the Sep’20 quarter. The economy reasonably gained momentum, following the lifting of restrictions in Victoria.

Retail Sales Update:

The data released by the Australian Bureau of Statistics mentioned that retail sales rose 7.1% (on a seasonally adjusted basis) in Nov’20 as compared to the preceding month. On YoY basis, retail sales surged 13.3% over pcp. Discounts offered by retailers, following the Black Friday and Christmas sales spurred the monthly retail turnover. Favourable unemployment rate at 6.8% in Nov’20 and increase in wages (represented by the Wage Price Index with +1.4% in Sep’20) pushed-up disposable income and accelerated household spending.

Figure 1. Retail Sales Have Been Trending-Up Following Easing of Restrictions:

               

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

Retail Sales by Industry:

Of the total increase in retail turnover, clothing, footwear, and personal accessories posted a significant increase of 26.7% in Nov’20 over the prior month. This was followed by department stores with a 21.1% increase, and household retailing which had shown a 12.7% increase led by electrical and electronics goods, and furniture. The entry of new games for consoles during the holiday season and the launch of new iPhones drove the household retailing. Cafes, restaurants, and takeaway food services segment registered a 6.7% increase. Other retailing representing recreation goods, pharmaceutical and book retailing, improved by 7.9% in Nov’20. The data also showed a drop of 0.3% in the food retailing segment, primarily due to poor liquor sales.   

Figure 2. Growth Across Categories with The Exception of Food Retailing:

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

Retail Sales by States:

Retail stores at Victoria experienced a first full month of sales during November 2020, following the easing of lockdown in the state. Victoria alone added about $1.5 billion of the $2.1 billion increase in retail sales in November 2020 over the preceding month. South Australia witnessed a short lockdown within November 2020 and experienced a decline of 0.2% in M-o-M change.

Online Sales Update:

The prevalence of online shopping gained momentum during the start of the pandemic. Restrictions placed on retail stores saw consumers adapted to e-retailing. While easing norms and re-opening of Melbourne in late October 2020 saw consumers turned back to retail stores. Online sales fell 0.9% in Nov’20 over the prior month, led by a sharp contraction in the online food retailing category.

Credit Card Lending:

The uptick in consumer confidence, reflecting the ongoing success across Australia in containing the outbreak resulted in improvement in household spending. This was also seen in credit card lending, which had increased by $1.0 billion in Nov’20 over the previous month (or +3.3%). It is worth mentioning that Australians were less opted for loan deferral schemes recently. As per the data by The Australian Prudential Regulation Authority, loan deferrals to total loans declined from a peak of 9.0% as of July 2020 to just 2.8% as of November 2020.

Figure 3. Rebound in Credit Card Lending:

Source: Data from The Australian Prudential Regulation Authority, Chart Created by Kalkine Group

Key Risks: Retail spending is highly correlated to macro-economic headwinds. During the pandemic, consumers less spent on discretionary products and preferred to save more. This had kept retail sales in negative growth territory. Consumer spending although improved but lower than pre-COVID levels and is dependent on government stimulus. The Expiration of the JobsKeeper program in March 2021 may pose threat to retail sales growth. Further, capex spend by businesses declined by 3% in Sep’20 quarter over the preceding quarter, implying a bleak outlook for employment and personal income growth.

Figure 4. Key Risks Impacting Consumer Spending and Retail Sales:

Source: Chart Created by Kalkine Group 

Outlook: As business confidence improved post-re-opening of the economy, businesses increasingly reported a surge in revenues. In a separate release by the Australian Bureau of Statistics, 25% of businesses have reported an increase in December 2020 revenues over the last month. The survey states that 22% of businesses were expecting positive monthly revenue growth, especially from Retail Trade, and Arts and Recreation Services. About two-thirds of medium and large ready with businesses plan to employ new staff over the next three months.

In another release by the Australian Bureau of Statistics, household wealth showed a progressive growth of 1.7% in September 2020 quarter (on YoY basis) and 1.5% in June 2020 quarter. Revival in the housing market with upward trending property prices and favourable returns in the domestic and international stock market contributed to upside valuation gains in superannuation funds. The increase in household wealth is likely to provide support for a surge in discretionary spending going forward. Considering the improvement in retail sales, we figured out 4 stocks on ASX from the retailing industry that are set to see the momentum from the development.

(1) Adore Beauty Group Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)

(M-cap: A$ 513.91 Million, Annual Dividend Yield: 0%)

Strong Growth in Online Retailing: Adore Beauty Group Limited (ASX: ABY) provides cosmetic, skincare, make-up, hair, and fragrance products through an e-commerce platform. The company experienced strong revenue offtake from new customers and the average order value improved from $97.5 in FY19 to $100.5 in FY20. Customers changed their shopping preferences towards online retailing owing to COVID-19 which resulted in a 65% growth in revenue in FY20 over the prior year.

ABY has products in essentials, self-care, and at-home devices, providing adequate diversification to sail through the pandemic. ABY continues to spend on the acquisition of new customers through marketing campaigns, advertisement, and branding. Its employee costs also increased, leading to a contraction in EBITDA margin to 3.4% in FY20 as against 4.1% in FY19. Activities such as the launch of operations in New Zealand, etc. eroded profitability with a net loss of $1.2 million in FY20 as against a net profit of $1.0 million in FY19. ABY reported cash balance of $16.6 million as of June 2020, up from $1.9 million in pcp.

The company performed better than expected during Black Friday and Cyber Weekend. Its H1 FY21 revenue is expected to reach $95.2 million, exceeding the initial estimate of $89.0 million as set out in the prospectus.

Outlook: ABY is expecting online penetration to reach 24.8% by 2024 in Australia. The company filed a prospectus with ASX to raise about $269.5 million through issue of shares. The extension of lockdown in Victoria spurred online sales throughout H1 FY21. ABY is expecting positive EBITDA for H1 FY21. 

Valuation Methodology: Price/ Earnings Multiple Based Relative Valuation (Illustrative)

Price/ Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

A-VIX vs ABY (Source: Refinitiv, Thomson Reuters)

Stock Recommendation: The stock is a recent debutant to ASX. It had filed IPO on October 2020. The stock posted positive 1-month returns of ~3.97%. It is currently trading below to the average of 52-week high price of $7.420 and 52-week low price of $5.080. ABY is benefited from rapidly growing online sales through adequate product diversification and the launch of products in new markets. With proceeds of $269.5 million expected to receive, ABY will upsize the e-commerce beauty care market. ABY appointed new CEO, Kate Morris, effective from 24 August 2020. The stock just started to perform well over the market volatility index. We have valued the stock using the Price/ Earnings multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). For this purpose, we have taken peers such as Temple & Webster Group Ltd. (ASX: TPW), Harvey Norman Holdings Ltd. (ASX: HVN), Beacon Lighting Group Ltd. (ASX: BLX), to name a few. Considering the rapidly growing online business, likely proceeds from share issuance, the current valuation and trading levels, we give a “Buy” recommendation on the stock at the current market price of $5.50 up by 0.732% on 18^th January 2021.  

(M-cap: A$ 2.16 Billion, Annual Dividend Yield: 3.35%)

Domestic Casino Gaming Rebounded: SkyCity Entertainment Group Ltd. (ASX: SKC) operates gaming and casinos in Australia and New Zealand. The company provides various casinos accompanied by various bars, hotels, restaurants, and convention centres. Closure of New Zealand properties and SkyCity Adelaide due to pandemic-induced lockdowns dented the revenue registering a de-growth of 20% in FY20 over last year. Revenue plunged across all properties. It had ramped-up online casino services in New Zealand which propelled customer growth (+35k added as of Aug’20). SKC reported a drop in EBITDA margin to 23.5% in FY20 as compared to 35.3% in FY19 due to weak turnover following the closure of properties.

SKC completed equity rising for $230 million and secured an additional debt of $160 million to retaliate the COVID-19 impact. It had received debt covenant waivers and extension of debt maturities. SKC intends to sell non-core assets such as AA centre. The company had a cash balance of $54.2 million as of June 2020.

YTD Oct’20 Trading Update: SKC reported improvement in local gaming activity with Auckland, Hamilton and Queenstown showed resilient performance for the YTD ending October 2020. Its SkyCity Adelaide operations posted positive EBITDA and cash flows. Its New Zealand online casino saw YTD EBITDA margin of over 20%.

Outlook: The company’s Adelaide expansion project is on-track and is expected to open in late November 2020. The company had $20 million remaining capex to be spent on this project. The construction of Horizon Hotel is expected to get over by late 2021 and NZICC around mid-2023. SKC is expecting EBITDA to be above to FY20 levels but below pre-COVID and FY19 levels. 

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

EV/ EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

A-VIX vs SKC (Source: Refinitiv, Thomson Reuters)

Stock Recommendation: The stock corrected with 1-month and 3-month returns of -11.11% and 2.44%, respectively implying accumulation opportunity. It is currently trading slightly above to the average of 52-week high price of $3.990 and 52-week low price of $1.095. With a sleuth of measures to tackle the COVID-19 situation, SKC is expecting domestic casinos to continue to perform well. It had ramped-up online casino services in New Zealand which propelled customer growth. The company is expecting FY21 EBITDA to be over FY20 levels. It is on track to pay the final dividend for FY21. The stock performed well over the market volatility index. We have valued the stock using the EV/ EBITDA multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). For this purpose, we have taken peers such as Aristocrat Leisure Ltd. (ASX: ALL), Star Entertainment Group Ltd. (ASX: SGR), Tabcorp Holdings Ltd. (ASX: TAH). Considering the performance of domestic casinos business, expansion plans, the current valuation and trading levels, we give a “Speculative Buy” recommendation on the stock at the current market price of $2.800 down by 1.755% on 18^th January 2021.

(3) Kogan.com Ltd. (Recommendation: Hold, Potential Upside: Low Double Digit)

(M-cap: A$ 2.12 Billion, Annual Dividend Yield: 1.04%)

Solid Revenue Growth in Marketplace: Aided Kogan.com Ltd. (ASX: KGN) operates as a marketplace for mobile, broadband, insurance, and travel-related products. The company reported a 13.5% growth in revenue in FY20 over the prior year, mainly due to solid performance in 2HFY20 backed by seller engagement and seamless listing of products in Kogan.com and New Zealand portal. KGN experienced an uptick in customer orders and an increase in average sales per customer in FY20. Through the brand building strategy, KGN witnessed an increase in repeated orders and orders from new customers. Its exclusive brands business clocked YoY revenue growth of 34.1% in 2HFY20 over pcp. Revenue growth was visibly seen in all verticals in FY20. EBITDA margin improved to 9.7% in FY20 (vs. 7.0% in FY19) driven by commission-based revenue model at Kogan Marketplace and New Vertical businesses. KGN closed the full-year with a cash balance of $146.7 million as of June 2020. This included proceeds of $100 million from the private placement of shares. It had undrawn bank lines of $30.0 million.

In the latest trading update, KGN achieved gross sales growth of 99.8% in YTD ending Oct’20 aided by the Product Division and Kogan Marketplace. Its adjusted EBITDA improved by 268.8% over the last year.

Outlook: KGN acquired a 100% stake in Mighty Ape. Mighty Ape operates as a New Zealand-based online retailer focussed on gaming, toys, and other entertainment categories. Mighty Ape is expected to clock revenues of $137.7 million in FY21 and EBITDA of $14.3 million (pre-synergies).

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

EV/ EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

A-VIX vs KGN (Source: Refinitiv, Thomson Reuters)

Stock Recommendation: The stock corrected with 3-month returns of -17.54%. However, it has yielded positive returns of +14.63% in the last one month. It is currently trading above to the average of 52-week high price of $25.570 and 52-week low price of $3.450. KGN has declared a fully franked final dividend of 13.5 cents per share, representing total dividend of 21.0 cents per share in respect of FY20. KGN is expecting volume growth in all businesses divisions. In the recent development, Federal Court imposed a penalty of $0.35 to KGN in respect of four day coupon code promotion conducted in June 2018 which was against the Australian Consumer Law. But this will not have a material impact on operations of the company. The stock performed well over the market volatility index. We have valued the stock using the EV/ EBITDA multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). For this purpose, we have taken peers such as Temple & Webster Group Ltd. (ASX: TPW), Redbubble Ltd. (ASX: RBL), Collins Foods Ltd. (ASX: CKF). Considering the decent performance in the YTD ending Oct’20, the current valuation and trading levels, we give a “Hold” recommendation on the stock at the current market price of $20.680 up by 3.090% on 18^th January 2021.  

(4) Nick Scali Ltd. (Recommendation: Hold, Potential Upside: Low Double Digit)

(M-cap: A$ 867.51 Million, Annual Dividend Yield: 4.43%)

Rebound in Customer Activity Post Re-Opening: Nick Scali Ltd. (ASX: NCK) operates retail furniture stores in Australia. The company specializes in leather and fabric lounges, dining rooms, bedrooms, and occasional furniture. Witten sales order surged ~9% in FY20 aided by the increased level of customer activity following re-opening of stores during H2 FY20. The company experienced surge in-store traffic by 30% since re-opening. Overall sales de-grew by 2.1% due to store closures and a subdued trading environment. Cost reduction in property rentals, marketing, and general expenses alongside an increase in retail pricing translated to an EBITDA margin of 35.9% in FY20 (vs. 23.9% in FY19). Online sales contributed to strong EBITDA. NCK deferred three store openings to FY21 and two stores to open in November 2020. Rent relief from the landlord, JobsKeeper program, and an increase in customer deposits contributed to an increase in cash balance to $63.0 million as of June 2020.

In the latest trading update, total sales orders for Q1 FY21 have been up by 45% over pcp, and this trend has continued through October 2020. Online sales surged 47% in the same period.

Outlook: NCK expects profits for H1 FY21 to be up by 50%-60% compared to H1 FY20. Its full-year FY21 net profit to surge 70%-80% over FY20.  

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

EV/ Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

A-VIX vs NCK (Source: Refinitiv, Thomson Reuters)

Stock Recommendation: The stock posted positive 3-month and 6-month returns of ~16.00% and 61.68%, respectively. It is currently trading above to the average of 52-week high price of $11.610 and 52-week low price of $2.650. NCK experienced a strong rebound in customer in-store traffic post re-opening. Its Q1 FY21 orders increased by 45% over pcp. Online sales to continue to drive EBITDA margin. The stock performed well over the market volatility index. We have valued the stock using the EV/ Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). For this purpose, we have taken peers such as Lovisa Holdings Ltd. (ASX: LOV), Adairs Ltd. (ASX: ADH), Blackmores Ltd. (ASX: BKL), to name a few. Considering the strong EBITDA margin, decent Q1 FY21 performance, the current valuation and trading levels, we give a “Hold” recommendation on the stock at the current market price of $10.590 down by 1.121% on 18^th January 2021. 

Comparative Performance Charts (ABY VS SKC VS KGN VS NCK)

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Disclaimer  

 

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