Stocks’ Details

Wesfarmers Limited

Sales Growth in Bunnings and Officeworks: Wesfarmers Limited (ASX: WES) is engaged into retailing of home improvement and office supplies and general merchandise. The market capitalisation of the company stood at $53.18 billion as on 22^nd July 2020. Recently, the company provided a retail trading update, wherein it stated that it has been experiencing significant demand growth in Bunnings and Officeworks as customers continue to spend more time working, learning and relaxing at home. In Bunnings, the strong sales performance was assisted by continued growth in consumer and commercial markets in all major Australian trading regions as well as in all product categories. While the strong sales growth in Officeworks was underpinned by continued demand for technology, home office furniture and learning and education product.

Sales Performance (Source: Company Reports)

Outlook: During FY20, Bunnings is expected to incur costs of around $70 million, which are associated with trading restrictions in New Zealand, the permanent closure of seven small-format stores 1H, and the accelerated rollout of its online offering, including the write-off of legacy e-commerce platform assets. WES has scheduled to release its FY20 results on 20 August 2020.

Key Risks: The group is exposed to various strategic risks such as increased competition, ineffective execution of strategy and digital disruption to industry structures. In addition, the business is also sensitive to currency volatility, adverse fluctuations in commodity price and reduced access to funding.

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

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

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

Stock Recommendation: Retail businesses of the company has delivered total online sales growth of 89% in Calendar Year to date (9^th June 2020), reflecting the significant investment across the Group in respective e-commerce capabilities in recent years and greater customer preference for shopping online during COVID-19. EBITDA margin of the company stood at 15.2% in 1H FY20, reflecting YoY growth of 3.0%. Over the span of five-years (2015-2019), the company has maintained a positive free cash flow, which indicates that the company has been effectively using its working capital. 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 the purpose, we have taken peers such as JB Hi-Fi Ltd (ASX: JBH), Harvey Norman Holdings Ltd (ASX: HVN), Collins Foods Ltd (ASX: CKF), etc. Hence, considering the decent growth in online sales during Covid-19 and effective use of working capital, we give a “Hold” recommendation on the stock at the current market price of $46.100 per share, down by 1.706% on 22^nd July 2020.

Kogan.Com Ltd

A Look at June 2020 Business Update: Kogan.Com Ltd (ASX: KGN) operates a portfolio of retail and services businesses. In the month of June 2020, the company witnessed a further acceleration in its gross sales, gross profit and adjusted EBITDA following its continued focus on improving customer value. During Q4 FY20, the company reported a growth of 95%, 115% and 149% in gross sales, gross profit, and adjusted EBITDA against Q4 FY19. As of 30^th June 2020, active customers stood at 2,183,000, with an incremental rise of 109,000 in active customers during the month of June 2020. Also, adjusted EBITDA for FY20 moved up by 57%. The below picture provides an overview of financial performance:

Key Financials (Source: Company Reports)

Federal Court Judgement: In another update, the company advised the market that Federal Court of Australia has upheld allegations made by the ACCC that Kogan Australia Pty Ltd has broken the Australian Consumer Law in relation to a four-day promotion conducted in June 2018 where Kogan advertised a coupon code by which consumers could achieve a 10% price reduction at checkout. However, the company stated that the promotion was not intended to mislead any shoppers and was implemented to allow customers access to lower prices than the prices which applied without the coupon or promotion. KGN added that the ruling will not have any adverse impact on its promotional activities. Moreover, a further hearing will be held concerning a penalty.

M&A Opportunities: The company is optimistic about M&A opportunities with a track record of executing value accretive acquisitions and proven ability to leverage existing infrastructure to generate operating leverage.

Key Risks: As of now, the risks with the business include significant market volatility caused by coronavirus pandemic (COVID-19). Also, this may create an adverse impact on the company’s supply chain. In addition, financial and operational performance of the company could be affected by changes in consumers’ disposable incomes, or their preferences as to the utilisation of their disposable incomes as its most of the products are discretionary goods.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

P/E Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: Recently, the company has raised $20 million through completion of Share Purchase Plan, which was increased by $5 million above its original target of $15 million considering the strong support shown by eligible shareholders. The company has also raised $100 million through placement. This equity raising is likely to provide the financial flexibility to act quickly on future value accretive opportunities that broaden its offering, expand its customer base or enhance its operating model. We have valued the stock using the P/E multiple based illustrative relative valuation method. For the purpose, we have taken peers such as Temple & Webster Group Ltd (ASX: TPW), Super Retail Group Ltd (ASX: SUL), Bapcor Ltd (ASX: BAP) etc., and arrived at a target price of high single-digit upside (in percentage terms). Hence, considering the growth in key financials during June 2020 quarter, growth in active customers, and capital raising, we give “Hold” rating on the stock at the current market price of $17.410 per share, down by 1.915% on 22^nd July 2020.

Baby Bunting Group Limited

Decent Sales Growth: Baby Bunting Group Limited (ASX: BBN) is a specialty retailer of baby goods. On 22 July 2020, the company provided an update on its financial results for FY20, wherein it informed that it expects its pro forma FY20 EBITDA to be in between $33 million and $34 million, representing a growth of 22% to 25% on the previous year. Further, the company expects pro forma NPAT to be in the range of $18.5 million -$19.5 million. The preliminary unaudited results for FY20 include total sales of around $405 million, reflecting growth of around 12%. Comparable stores sales growth for 2H FY20 stood at 10.5%, with full- year comparable store sales growth of 4.9%. The company has continued to perform strongly and grow market share. BBN has achieved positive comparable store sales growth, gross margin improvement and retail cost leverage. The below picture gives an overview of pro-forma sales:

Pro-forma Sales (Source: Company Reports)

What to expect: The company is going to open its next store to open at Westfield Knox in Melbourne with further stores planned to follow in New South Wales. Due to the ongoing restrictions in Melbourne and surrounding areas, the company expects Covid-19 to have an impact into FY21 in ways that may be unexpected. The company is scheduled to release its FY20 results on 14 August 2020.

Key Risks: The company’s business is sensitive to economic, environmental, and social sustainability risks, which affects the company’s ability to operate at a particular level of economic production over the long term. BBN is also exposed to competitive and digital disruption risks, external economic risks, and property and operational risk.

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

Stock Recommendation: The company ended FY20 with a cash balance of $13 million. Gross margin and EBITDA margin of the company stood at 36.9% and 12.8% in 1H FY20, reflecting YoY growth of 2.3% and 0.7%, respectively. We have valued the stock using EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Thus, considering the decent growth in sales, gross margin improvement and retail cost leverage, we give a “Hold” recommendation on the stock at the current market price of $3.500 per share, up by 11.111% on 22^nd July 2020, owing to its FY20 results update.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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