Kogan (ASX: KGN) is a portfolio of retail and services businesses that includes Retail, Marketplace, Mobile, Broadband, Insurance and Travel offerings. To put all that in context, it has been dubbed by some the ‘Amazon of Australia’. Much of Kogan’s recent success has been fueled by a significant lift in sales, earnings and customers as the pandemic pushes shoppers online. From humble beginnings in 2016, the business is now worth ten-times that of Myer. Scaling organically, with close to $1bn in sales. Co-founder Ruslan Kogan noted in an interview with the AFR that the structural shift to online retailing has been turbo charged by the pandemic, “we are seeing it advance several years in the space of a few months.” A clear beneficiary of the disruption caused by COVID-19. The most recent update reported customer numbers were now past 2m with 126,000 active customers joining in May. Gross profit and adjusted EBITDA both lifted more than 130% from the fourth quarter to the end of May. Heavy marketing in recent months assisting as well. The $115m capital raising in June was oversubscribed, with the business considered well placed to take advantage of the significant disruption to the Australian economy. The Matt Blatt acquisition and online re-release its most recent turnaround story. While its acquisitions have been few and far between, KGN’s track record is impressive. Before the $4.4m Matt Blatt deal, Kogan in 2016 acquired Dick Smith's online assets including its customer database for $2.6m. A transaction that has been a material source of incremental earnings ever since. Co-founders Kogan and David Shafer, who consider themselves ‘tight arses’, have a disciplined approach to managing the business which operates at an impressively low cost - one of the lowest in the retail sector. Gross margin for the business sits around 30%. If that kind of discipline can be transferred into the way they take on new companies, it will likely be an even brighter future. Main Observations
  • ROE is very impressive at 33.1%. As we have said many times before, anything above 20% is exceptional.
  • Revenue growth is strong and expected to improve in futures periods. EPS growth is forecast to outpace revenue growth in every period to FY4. A good indication of efficiency within the business.
  • KGN trades on a PE of 49.7x, not exactly cheap although the metric is expected to improve, down to 34.8x in FY4.
  • Of the four brokers surveyed by Thomson Reuters half have a buy or strong buy recommendation.
  • The stock is trading at a 14.8% premium to the average broker target price.
WHAT SORT OF INVESTMENT IS KGN? KGN is a pure growth play. Perfectly positioned to take advantage of the structural shift to online retailing and a business that is focused on driving efficiencies. It has built a platform that allows it to be agile and innovative with high levels of customer satisfaction. The growing portfolio of offering provides diversified income streams also assists in safeguarding earnings. What is encouraging to see is that majority of its traffic is driven by customer loyalty and brand recognition. Sticky customers are always a good sign. KGN is also in tune with the times, implementing some clever A.I and algorithms to assist in personalisation and optimisation of its platform. Its proprietary marketplace platform enables it to achieve ongoing growth in product selection and sales capacity without needing to make further investments in inventory. You also get a handy 2.1% yield just for holding it. BROKER STUFF Not a lot of broker commentary on KGN. Credit Suisse pointing out the dilutive nature of the recent $115m capital raising, as no acquisition target has been announced. That said, the broker, does observe the availability of quality brands following the recent acquisition and online re-launch of Matt Blatt. Target price lowered less than one percent to 1172c. UBS was encouraged by the recent business update. Execution has been strong and the market supportive. Believes the solid top line will attract investors looking for a robust a revenue/gross profit multiple. Target price lifted 42.4% to 1210c. SHORT TERM TECHNICAL VIEW It has been an impressive couple of months for the KGN share price. The stock is up almost 300% in 73 days from its March low and is currently ~10% off its June high of 1575c. RSI has just moved back into ‘overbought’ territory. Momentum fading slightly as well. Short term weakness likely to provide an attractive entry point for a stock that has been trading in only one direction. One striking feature of the chart is the strength of the uptrend from the March low. Ben and Marcus were talking about a strategy called bottom left to top right  (BL2TR) last week and KGN knocks the lights out as a perfect example of that approach (on a 3-month time period, see below chart). The theory looks at when the balance of probability is in your favour, in individual stocks, were your odds are always going to better if you 'play' in stocks that are moving from bottom left to top right (BL2TR) on a chart, not top left to bottom right (TL2BR). Click here to view the full article. TOP INVESTORS Nothing very exciting emerges after sorting by the most recent filing date. In August last year, co-founders Ruslan Kogan and David Shafer were quoted saying they had no intention to sell KGN shares before the release of FY20 results, which are coming up in August. They had been known for offloading large parcels of stock following strong demand from existing shareholders. SHORTING There has been a consistent reduction in short positions from March to date. The significant drop mid-June from 1.94% to 0.67% followed KGN’s capital raising and trading update. At the moment the stock trades with a short interest of 0.57%. A far more palatable number than the 7.5% a year earlier. CONCLUSION There are a lot of factors moving in the right direction for KGN. Systematic shift to online retail. Strong customer growth, diversified earnings and improving margins. It is also well positioned to take advantage of market disruption through acquisitions. Not to mention impressive fundamentals and a strong technical uptrend. The real question is price. There are questions about the economy, stimulus and the larger macro picture that come into play on the other side of the equation, however, the balance of probability is likely in KGN’s favor. Buy on weakness with anything around 1400c looking appealing.

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