Adore Beauty Group Limited

Adore Beauty Group Limited (ASX: ABY) operates as an online retailer providing beauty and personal care products. It operates in skincare, make-up, hair, fragrance, and wellness product categories. ABY was listed in ASX on October 23, 2020.

H1FY22 Result Spotlight:

• ABY clocked 18% YoY growth in revenue reaching $113.1 million. The company witnessed an increase in returning customers with a 56% uptick over the prior year. This was partly offset by a 12% dip in new customers.
• Continued investment in loyalty programs and mobile applications helped to achieve the growth momentum.
• It had onboarded fourteen new brands and witnessed robust offtake in adjacent products such as Fragrance which grew by 43% and Korean Beauty at 98% growth over the prior year.
• ABY is progressing on a plan to unleash its first private label brand in the skincare segment in Q4FY22.
• Its EBITDA slipped from $5.2 million in H1FY21 to $3.8 million in H1FY22 but margin broadly in-line with guidance of 3.3%. This was on the back of higher marketing spending and investment in brand awareness campaigns. ABY also intended to seek growth in its owned channels.
• Net profit tumbled from $3.1 million in H1FY21 to $2.0 million.
• Supplier closures and seasonality factors impacted spurt in inventory during the period. It had closed the period with a cash balance of $25.1 million as of December 31, 2021, as compared to $29.0 million as of June 30, 2021. Nevertheless, ABY continues to be debt-free with nil external borrowings.
• In the recent news, Mitsubishi UFJ Financial Group ceased to be a substantial shareholder.

Profitability Trend (Analysis by Kalkine Group)

Key Risks: Increasing supply chain concerns may affect the inventory building and limit the margin expansion. Changing customer preferences and higher household savings ratio may limit household spending and affect volume expansion. Fears of the lockdown restriction due to increasing virus strain may influence consumer sentiment and invariably affect discretionary spending.

Outlook: ABY is expecting the beauty and personal care market in Australia to hit 3.8% CAGR, reaching $11.2 billion by 2024. The online segment is forecasted to reach 11.4% of the total market. It seeks to penetrate to US, UK, and China. ABY reaffirms the EBITDA margin target of 2-4% in the short-to-medium term. The first six weeks of H2FY22 surged by 14% YoY, proving positive trading in FY22.

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

Source: 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: The stock of ABY has been corrected by ~46.19% in the past three months. The stock is trading below to its average of the 52-weeks’ low-high price band of $1.945-$5.360. The stock has been valued using the P/E-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount than its peers, considering the slowdown in new customers and supply chain issues impacting margin expansion in H1FY22. For this purpose of valuation, a few peers like Kogan.com Ltd. (ASX: KGN), Temple & Webster Group Ltd. (ASX: TPW), Breville Group Ltd. (ASX: BRG), and others have been considered. Considering the spurt in revenues, the launch of private label brands, investment in owned channel and loyalty programs, nil external debt on the balance sheet, indicative upside in valuation, and associated key business risks, we give a ‘Speculative Buy’ rating on the stock at the current market price of $2.010 as of 21 March 2022, 10:35 AM (GMT+10), Sydney, Eastern Australia.

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

ABY Daily Technical Chart, Data Source: REFINITIV 

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

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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 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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