Kogan.com Ltd


KGN Details

Strong operating performance led by Private Label inventory and automation initiatives: For FY17, Kogan.com Ltd (ASX: KGN) reported a bumper result with 37.1% yoy (year on year) growth in statutory revenue at $289.5 million, while posting Pro Forma EBITDA of $13.2 million (adjusting for one-off transaction costs associated with its Initial Public Offering in July 2016 and unrealized foreign exchange gains and losses). Pro Forma EBITDA was thus up 230.0% on prior year (FY16: $4.0 million) and up 91.3% on Prospectus forecasts, reflecting revenue growth and margin expansion. Further, Pro Forma NPAT of $7.2 million significantly outperformed Prospectus forecasts of $2.5 million. Gross margin was 17.9%, exceeding the Prospectus forecast by 2.7pp, driven by precision demand planning to build Private Label inventory, automation initiatives and the accelerated growth of Kogan Mobile.


Results overview; (Source: Company reports)

Kogan.com had 955,000 active customers as at 30 June 2017, up 36.0% on the prior year. The company has successfully executed on its marketing initiative and continues to focus on increasing annual revenue and gross profit per customer. Kogan Mobile is continuing to scale, with annual revenue reaching $3.6 million in FY17 because of both new customer acquisitions and repeat customers.

During FY18, the company will invest in expanding the Kogan Retail Private Label range, where preexisting online demand is already established and emerge as a price leader with a strong competitive advantage. Further, partnerships with select brands and distributors via Kogan Marketplace is giving an effective channel to market via a direct voice with the Kogan Community. Moreover, FY18 has started well with 34.9% year on year growth in revenue in July 2017.

Stock Performance: The stock has moved up 50.9% in the past three months, while it is up 77.8% (as of August 17, 2017) on YTD (year to date) basis.  The stock moved up 8.8% on August 18, 2017. The outlook is optimistic, but given the sharp movement in stock price to high levels, we give a "Hold" recommendation at the current market price of $2.61
 

 
Mobile Embrace Ltd


MBE Details

Acquisition of C2B Solutions Pty Ltd for a total consideration of $6.5M: Mobile Embrace Ltd (ASX: MBE) has recently acquired the C2B Solutions Pty Ltd (C2B), a profitable and growing Performance Marketing business. MBE has acquired C2B on favorable terms with an upfront cash consideration of $2.5M. In addition to the upfront consideration and subject to achieving targeted earnings over the next 2 years, there will be additional cash consideration $2M for each year of successful achievement. The upfront consideration is funded from MBE’s cash reserves. C2B is a successful Australian Performance Marketing business that specializes in providing businesses with a highly efficient customer acquisition offering including the generation of high volume, permissioned consumer leads on online and mobile devices and; facilitating conversion from a quality digital lead to a highly-engaged customer via outbound call centers. The acquisition is in line with MBE’s strategy of establishing a larger, more dominant digital Performance Marketing business across Australia, New Zealand and the UK with improved earnings and predictable revenue streams.

C2B has delivered highly successful and profitable outcomes for its clients with client retention at approx. 90%, and clients span across several industries with a growing new business development pipeline. C2B is expected to generate EBITDA of $2.5M for FY2018 which implies that the acquisition will be immediately EPS accretive to MBE. The growing importance of C2B’s offering to its clients is supported by research, with 65% of all businesses finding generating traffic and leads the top marketing challenge and 74% of all businesses seeing converting leads to customers the key marketing priority.
Stock Performance: The stock has moved up 48% in the last three months, while it is down 78.8% in the past one-year (as on August 17, 2017) impacted by soft outlook for FY17 due to delay in its direct carrier billing (DCB) activities. However, we believe that the increased focus on marketing transaction volumes, and opportunity in several underpenetrated regions might act as catalysts for the future. MBE stock initially rose about 5.6% on August 18, 2017 and then settled at a rise of about 3% following the announced acquisition early last week. We maintain a “Buy” recommendation on the stock at the current price of $0.073
 

 
Tatts Group Ltd


TTS Details

Performance impacted by merger costs, fewer jackpots and bad weather: Tatts Group Ltd (ASX: TTS) ended last week with a 4.2% rise in stock price on August 18, 2017, post the slip at the back of its latest result. TTS reported a statutory after-tax profit of $220.5 million, down 5.7% on last year due to significant merger costs ($23.4 million net of tax), carrying a $137.8 million revenue ‘hit’ from a markedly lower jackpot run (with only 31 major jackpots compared to 45 last year), and, bearing the brunt of poor weather on the racing calendar. However, on a continuing operations basis (before merger costs), the group reported robust result with after-tax profit of $244.6 million. The impact of both cycling over last year’s record lottery jackpot run, and poor weather on the racing calendar, was reflected in group revenues which declined by 5.1% to $2.78 billion. Notably, during the period the company’s focus on controlling expenses led to 4.9% ($118.4 million lower than last year) decline in expenses before merger costs. Accordingly, with all these outcomes, EBITDA from continuing operations (before merger costs) was down 6.3% to $465.7 million. Additionally, the group achieved a significant win in its lotteries unit with the grant of an exclusive license to conduct public lotteries in Victoria for a further 10-year term (new license commencing on 1 July 2018), and the company will make a single premium payment to the State of Victoria of $120 million (payable on 1 July 2018) as consideration for the license grant.
 


Results Overview; (Source: Company reports)

Tatts noted its powerful start to the 2018 financial year, benefiting from an Oz Lotto jackpot run leading into the new year underwriting a 25% lift in after-tax profits for the month of July. The profit performance coupled with strong operational cashflows led to a final fully franked dividend of 8.0 cents per share taking the total dividend paid in FY17 to 17.5 cents. Tatts’ lotteries online initiatives delivered world class results, with lotteries digital sales increasing to 14.5% of sales (up from 13.5% a year ago), and a greater proportion of digital lottery sales are typically achieved during periods of stronger jackpot activity. Similarly, UBET’s digital performance continued to build with 31.7% of its betting turnover sourced digitally up from 30.2% in FY16. Moreover, the ‘break and fix’ MAXtech business is reaping the benefit of the turnaround strategy implemented 3 years ago which involved refocusing on its core expertise in gaming & network infrastructure, and lifted its EBITDA 125.6% to $7.7 million (FY16: $3.4 million). Further, MAXtech’s performance was complemented by the strong and predictable revenues generated by the group’s gaming machine monitoring operation (MAX) which converted a 2.0% revenue uplift to a 4.6% increase in EBITDA (at $67.7 million) and a 5.0% lift in EBIT (at $55.0 million).

Stock Performance: The stock has declined 5.4% in the past three months, while it is flat (as of August 17, 2017) on YTD basis.  Given the challenging environment and rising competition, we give an “Expensive” recommendation on the stock at the current price of $4.19
 

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