Stocks’ Details

Kogan.com Limited

July 2020 Update: Kogan.com Limited (ASX: KGN) manages a portfolio of retail and services businesses, that includes Kogan Retail, Kogan Marketplace, Kogan Insurance, Kogan Travel and many more businesses. In a business update provided on 10 August 2020, the company informed that during the month of July 2020, its gross sales increased by 110%, as compared to the previous corresponding period. Further, the company’s gross profit increased by over 160% on pcp.  The company reported Adjusted EBITDA of more than $10 million and active customers of 2,309,000 as at 31^st July 2020. The company has scheduled to release its FY20 results on 17^th August 2020.

June Quarter Update: For the June 2020 quarter, the company had reported decent results which included YoY gross sales growth of 95% and YoY gross profit growth of 115%. During the quarter, the company was focused on improving customer value. Over the quarter, the company’s active customers grew to 2,183,000 as at 30 June 2020, with an incremental 109,000 active customers in the month of June 2020. At the end of the quarter, the company had a cash balance of $147 million.

In the first half of FY20, the company’s group sales stood at $322.9 million, up 16.4% on pcp. The company’s adjusted EBITDA and NPAT stood at $18.2 million and $8.9 million, respectively.

1HFY20 Results (Source: Company Reports)

SPP and Placement: The company recently closed a Share Purchase Plan (SPP) under which it received applications for around $115.28 million from 6,793 Eligible Shareholders representing a participation rate of 52.19%. Due to the strong support shown by eligible shareholders, the company has increased the SPP size by $5 million to $20 million. The SPP follows the successful completion of underwritten $100 million institutional placement which also received strong support from shareholders and new investors. The proceeds from the placement and SPP will provide additional financial flexibility to the company so that it can act quickly on future value accretive opportunities. The proceeds will also help the company in expanding its customer base and enhancing its operating model.

Key Risks: The company is exposed to risks related to the changes in the Australian retail environment and general economic conditions. Further, the company can also be affected by increased competition in its operating segments.

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

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

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

Stock Recommendation: Over the last three months, the stock of KGN has provided a return of 119.74% on ASX and is trading close to its 52-week high of $20.77. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of high single-digit upside (in percentage terms). For the purpose, we have taken peers like Temple & Webster Group Ltd (ASX: TPW), Super Retail Group Ltd (ASX: SUL), JB Hi-Fi Ltd (ASX: JBH), etc. Considering the company’s gross sales and revenue growth, its decent H1FY20 results, and recent SPP and Placement, we give a “Hold” recommendation on the stock at the current market price of $20.66, up by 9.835% on 10 August 2020, owing to the recent business update.

Adairs Limited

FY20 Results Highlights: Adairs Limited (ASX: ADH) is a leading specialty retailer of home furnishings in Australia and New Zealand. During the year ended 28 June 2020 or FY20, the company was able to achieve record sales and profit results, despite the challenges and uncertainties associated with the COVID-19 pandemic in the last quarter, demonstrating the resilience of the company’s business model and strength of its brands. For FY20, the company reported total group sales of $388.9 million, up 12.9% on the previous year. Over the year, the company’s online sales grew by 110.5% to $124.2 million, representing 31.9% of total sales. The company achieved NPAT of $35.28 million in FY20, up 19% on the previous year. For the second half of FY20, the company has declared a final dividend of 11.0 cents per share (100% franked), representing 72% of the second half underlying net profit after tax.

FY20 Results Highlights (Source: Company Reports)

Mocka Acquisition: One of the major highlights of FY20 was the acquisition of Mocka Products Pty Ltd in December 2019 for a total consideration of $84.5 million. Mocka contributed sales of $29 million and EBIT of $6.7 million during the year. Mocka’s performance was above expectations despite low inventory levels during Q4.

What to Expect: In FY21, the company expects to open 3-5 net new stores and upsize 3-5 existing stores across Australia and New Zealand. Looking forward, the company intends to accelerate its digital transformation through additional investment in customer acquisition, customer experience, platform and team. The company’s new National Distribution Centre will assist in enabling the company’s digital strategy and delivering profitable growth for the next decade.

Key Risks: The company is exposed to the uncertainties and threats related to COVID-19 pandemic. Further, the company is also exposed to the risks related to the changes in customer buying habits and seasonal trading patterns. The competitive environment in which the company operates is relatively stable, however, there is a risk that it may lose market share to new or existing competitors.

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

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

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

Stock Recommendation: Over the last three months, the stock of ADH has provided a return of 79.08% and is trading close to its 52-week high of $3.24. During FY20, the company significantly reduced its net debt to $1 million, down $7.2 million on FY19. The company currently has a Debt/EBITDA multiple of 0.93x with a fixed charge cover ratio of 2.64x. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of an upside of low double-digit (in percentage terms). Considering the company’s reduced debt levels, its decent FY20 performance, expected new store openings in FY21, and valuation, we give a “Hold” rating on the stock at the current market price of $3.05, up by 11.314% on 10 August 2020, owing to the release of solid FY20 results.

Mosaic Brands Limited

Temporary Closure of Stores in Victoria: Mosaic Brands Limited (ASX: MOZ) is a leading specialty fashion retail group which operates a network of 1,332 stores across Australia. In a market update provided on 10 August 2020, the company informed that it has temporarily closed all its stores in Victoria due to the restrictions imposed by the Government to stop the spread of COVID-19. The company continues to operate around 1100 stores in all other states and territories with strict safety protocols that comply with all Government directives, prioritising the health and safety of all team members, customers and the broader community. Further, the company is operating all nine online department stores. Lately, the company has been experiencing substantial improvement in its online sales.

H1FY20 Results: For H1FY20, the company reported total revenue of $413.8 million and underlying EBITDA of $32.7 million. Over the period, the company’s online sales grew to 10.1% of revenue. The Bushfires incident in November and December 2019 directly affected 20% of stores. At the end of H1FY20, the company had cash-on-hand of $49.1 million.

H1FY20 Result Highlights (Source: Company Reports)

FY20 Expectations: As a result of the material decline in foot traffic due to the impact of COVID-19 and temporary closure of the company’s stores, the company expects to report an EBITDA loss for FY20, with the second half loss exceeding the first-half EBITDA of $32.7 million. The company expects to return to profit in FY21.

Key Risks: The extent and duration of COVID-19 pandemic pose a threat to the company’s operating performance as it could result in a further decline in foot traffic and the closure of more stores. Due to the use of the financial instruments, the company is exposed to several risks including credit risk, liquidity risk, and market risk consisting of interest rate risk, foreign currency risk and other price risks.

Stock Recommendation: Over the last three months, the stock of MOZ has corrected by 23.74% on ASX and is inclined towards its 52-week low of $0.195, offering a decent opportunity for accumulation. Over the last five years, the company has witnessed significant improvement in its top line as well as the bottom line. From 2015 to 2019, the company’s revenue has increased at a CAGR of 68.12%. On a trailing twelve months (TTM) basis, the stock has an EV/Sales multiple of 0.3x, lower than the industry median (Specialty retailers) of 1x. The stock has a Price to Book multiple of 0.5x, lower than the industry median of 1.5x. This demonstrates that the stock might be undervalued at current levels. Considering the company’s top-line and bottom-line growth over the last five years, its decent performance in H1FY20, and current trading levels, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.560, up by 5.66% on 10 August 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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