Harvey Norman Holdings Limited

HVN Details

Harvey Norman Holdings Limited (ASX: HVN) operates as a retailer of homewares, kitchen appliances, and electrical goods through Harvey Norman, Domayne and Joyce Mayne brands. It operates 539 franchisees in Australia in FY21.

A Quick Look at Trading Update:

• Aggregated sales plunged 8.8% for the four-month period from 1^st July 2021 to 21^st November 2021. Its Australian franchisees’ division was worst affected, with an 11.3% fall due to lockdown restrictions in the majority of states. This was despite the company’s Contactless Click & Collect initiative.
• Comparable sales declined 22.6% in the said period. It had opened two new franchised complexes in NSW and SA with no new openings in international regions.
• Unaudited profit before tax for the three months period from 1^st July 2021 to 31^st October 2021 stood at $217.42 million. This represents a 5% drop over the previous comparable period.

FY21 Result Summary:

• For the full year ending June 30, 2021, HVN posted system-wide sales revenue of $9.721 billion as compared to $1.263 billion in FY20. This was primarily contributed by its franchisee business.
• EBITDA reported an uptick of 54.2% to reach $1.457 billion in FY21. All of its business segments showed strong profit growth. The offshore operated segment posted a 58.3% growth in profit before tax over the PcP. Its Franchisee division showed an astonishing growth of 80.2%, and property division grew by 68.3% in profit before tax over the previous year.
• It had posted a net debt of $295.54 million in FY21 as compared to net cash of $15.35 million in PcP, while net debt-to-equity stood at 7.47%.

Profit Before Tax Trend (Source: Analysis by Kalkine Group)

Key Risks: Change in lifestyle and buying behaviour may alter volume offtake. An increase in property prices may affect store rollout plans. A High unemployment rate and increasing household savings ratio may discourage discretionary spending. Lockdown worries and supply-chain disruptions are the near-term challenges.

Outlook: HVN is expecting to ramp up international expansion by the end of 2022. It expects to open eight company-operated stores overseas in FY23, with four stores in New Zealand, three in Malaysia, and one in Croatia.

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

Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last six months, the stock has been corrected by ~9.17%. The stock is trading lower than the average of the 52-week low price of $4.770 and the 52-week high price of $6.090. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation and arrived at a target price with an upside of low double-digit (in percentage terms). The company can trade at a slight premium to its peers, considering the scale of operations and adequate geographic presence. For the valuation purpose, peers such as Wesfarmers Ltd. (ASX: WES), Accent Group Ltd. (ASX: AX1), Nick Scali Ltd. (ASX: NCK) have been considered. Considering the strong growth in profit before tax in FY21, international expansion plans, valuation, and current trading levels, we recommend ‘Buy’ rating on the stock at the current market price of $4.810, as of 13 January 2022, 10:30 AM (GMT+10), Sydney, Eastern Australia.

HVN Daily Technical Chart, Data Source: REFINITIV 

Kogan.com Ltd

KGN Details

Kogan.com Ltd (ASX: KGN) is an Australian retailer operating brands such as Kogan, Ovela, Fortis, Vostok and Komodo. In addition to retail operations, KGN provides mobile, broadband, insurance, and travel-related services. As of June 30, 2021, KGN has over 3.207 million active customers in its marketplace platform. 

Material Business Updates:

• As announced on December 14, 2021, Bitbuy, a Canada-based crypto trading platform operator, agreed to acquire the domain name bitbuy.com from Kogan. Besides, it is agreed that KGN will provide marketing support to Bitbuy’s future launch into the Australian market.
• On December 13, 2021, Credit Suisse Holdings (Australia) Limited ceased to be a substantial holder in KGN.
• KGN has been removed from the S&P/ASX 200 Index effective prior to the open on December 20, 2021, as part of portfolio rebalancing activities.

Q1FY22 Trading Synopsis:

• Gross sales climbed 21.1% to reach $330.5 million over the last year. Successful integration of Mighty Ape and scaling of Kogan Marketplace and Kogan First resulted in improved topline.
• Despite the lockdowns, the company was able to grow its customer base in Kogan.com to reach 3.35 million, an increase of 30.7% over the prior year.
• It had achieved cost savings of $0.8 million through reduced inventory built-up. Overall inventories dropped from $227.9 million as of June 30, 2021, to $194.3 million as of 30 September 2021.
• Gross profit slumped 1.7% to $52.5 million but improved on a sequential basis.
• Its adjusted EBITDA stood at $10.8 million.

An Uptick in Gross Sales (Source: Analysis by Kalkine Group)

Key Risks: Heightened competition in e-commerce business may limit margin expansion. A slowdown in wage expansion and increasing unemployment levels may hurt household spending on discretionary products. Supplier concentration risk, rising inflation across the globe, and risk of cyber-attacks are some of the near-term headwinds.

Outlook: KGN is on track to grow its Kogan First membership to reach a medium-term goal of 1 million members. It is investing in logistics projects to streamline the businesses besides working on improving customer turnaround. KGN seeks to grow its exclusive brands. It plans to launch Jungle Express, a last-mile delivery service owned by Mighty Ape, in FY22. This will improve the delivery speed in the NZ market.  

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

Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last six months, the stock has been corrected by ~25.50%. The stock is trading lower than the average of the 52-week low price of $7.20 and the 52-week high price of $21.890. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation and arrived at a target price with an upside of low double-digit (in percentage terms). The company can trade at a slight premium to its peers, considering the growth in Q1FY22 gross sales, improvement in active customers, etc. For the valuation purpose, peers such as Redbubble Ltd. (ASX: RBL), Temple & Webster Group Ltd. (ASX: TPW), Super Retail Group Ltd. (ASX: SUL), and others have been considered. Considering the leadership position in loyalty membership business (Kogan First), synergies from the Mighty Ape acquisition, valuation, current trading levels, and key associated business risks, we recommend ‘Speculative Buy’ rating on the stock at the current market price of $8.410, as of 13 January 2022, 10:30 AM (GMT+10), Sydney, Eastern Australia.

KGN Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and is subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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