Discretionary retail, especially online, has been a buzzing sector in the wake of COVID, as consumers make the most of household stimulus payments and the inability to spend money on international holidays, and the greater time spent on the internet.
There’s even been a new term coined, “revenge spending,” as consumers take full advantage of their newfound shopping abilities, coming out of lockdown. Returning to physical stores is problematic for many people, but there is a huge level of income being ploughed into online discretionary spending, as reflected in some surging December 2020 results for the ASX’s cohort of retailers.
Over the last year, the S&P/ASX 200 Consumer Discretionary Index (code XDJ) has powered 57% higher, streeting the S&P/ASX 200 index’s return of 29.1%.
That rise has encompassed some stunning price rises from retailers in the last 12 months, including:
- Redbubble (RBL) up 707%
- Globe International (GLB) up 375%
- Adairs Holdings (ADH) up 334%
- Nick Scali (NCK) up 186%
However, the market enthusiasm for retail – particularly online retail – has pushed many stocks well past fair value, in the eyes of analysts.
But not every stock has caught the wave equally, and there are still some retailers that are far from what analysts’ consensus believes is an appropriate level for the share price.
Here are 3 that look to have significant room for the share price to rise.
1. Kogan.com (KGN, $13.31)
Market capitalisation: $1.4 billion
Three-year total return: +16% a year
One-year total return: +115.2%
Forecast FY22 yield: 3.1% fully franked (grossed-up, 4.4%)
Analysts’ consensus valuation: $20.50 (Thomson Reuters), $17.97 (FN Arena)
Kogan.com, founded by Ruslan Kogan from his parents’ Melbourne garage in 2006, at the age of 23, is now Australia’s number one online retailer, with a portfolio of retail and services businesses including Kogan Retail, Kogan Marketplace, Kogan Mobile, Kogan Internet, Kogan Insurance, Kogan Health, Kogan Pet Insurance, Kogan Life Insurance, Kogan Travel, its newly-acquired New Zealand business Mighty Ape and the online furniture business Matt Blatt.
In its December 2020 half-year result, Kogan.com delivered impressive numbers: gross sales surged by 97.4% to $638.2 million, revenue grew by 88.6% to $414 million, EBITDA (earnings before interest, tax, depreciation and amortisation) was up 184.4% to $51.7 million, and adjusted earnings per share (EPS) more than tripled to 35 cents. Statutory net profit lagged that growth, but was still 164.2% higher, at $23.6 million. Excluding Mighty Ape, Kogan.com customers increased by 76.8% to 3 million. The company declared a fully franked interim dividend of 16 cents per share, more than double that of the prior corresponding period.
Importantly for KGN, private label (“Exclusive brands”) revenue rose 115% in the first half and saw gross profit growth of 174.9%, making up 55.9% of overall gross profit. Third-party brands saw revenue growth of 50.5% and gross profit rose 77%. Analysts see Kogan’s private label offering as an increasingly important component of the business’ value proposition going forward.
But KGN shares have actually come off almost 30% in 2021 – leaving the stock looking very good value, especially with a fully franked dividend, rare in the online space.
2. Adore Beauty (ABY, $5.00)
Market capitalisation: $471 million
Three-year total return: n/a
One-year total return: n/a
Forecast FY22 yield: n/a
Analysts’ consensus valuation: $7.50 (Thomson Reuters), $7.47 (FN Arena)
Online beauty products retailer Adore Beauty Limited is Australia’s number one pure-play online beauty retailer, stocking more than 11,000 products from 260 leading beauty and personal care brands – from niche, cult brands through to the beauty industry’s biggest players – generating more than $121 million in sales revenue, and a net profit of $2.5 million in FY20. The company was floated in October 2020, raising $269.5 million at $6.75, giving it a market capitalisation of $635.3 million.
That market valuation has been cut to $471 million, at a share price of $5.00, which makes many investors think that the IPO valuation was too steep – a common refrain when a private equity heavyweight (in this case, Quadrant Private Equity) is involved as a vendor. Quadrant had only bought a 60% stake in the business, from founders Kate Morris and James Height, in September 2019, and sold down (along with Morris and Height) to 32.5 per cent in the IPO (all three key shareholders have agreed not to sell any more shares until the full-year accounts are released in August 2021.)
But investors can use that perception to get into a business that is performing very strongly, and has the “story” of growing customer numbers – and growing customer spend over time – to flourish in the years ahead, as the online penetration of the beauty and personal care market in Australia lifts from the current rate of 7.3% to be more in line with lags international markets such as the United States and the United Kingdom, where estimated online penetration levels of 15.4% and 12.7% respectively.
Adore Beauty performed well in adding customers through COVID – the company says that half a million new customers shopped on its platform last year – and in February, the company’s half-year result contained revenue and earnings growth well ahead of its prospectus forecasts. Adore Beauty is doing a lot right, and the analysts that follow it are quite bullish on its price prospects.
3. Booktopia (BKG, $2.46)
Market capitalisation: $341 million
Three-year total return: n/a
One-year total return: n/a
Forecast FY22 yield: n/a
Analysts’ consensus valuation: $3.53 (Thomson Reuters), $3.53 (FN Arena)
Online book retailer Booktopia, the largest independent online bookseller in Australia, floated in December 2020 after raising $43.1 million at $2.30 a share, giving the company a market capitalization at the offer price of $315.8 million. The shares jumped to $2.99 shortly after listing, but have disappointed investors since, retracing to $2.35 last month.
That opens up good value for potential investors, according to analysts.
The business performed strongly during the pandemic. For example, during the first half of FY21, Booktopia reported a 51.1% increase in revenue to $112.6 million, and a 502.3% jump in underlying EBITDA, to $8 million. This was driven by the shift to online shopping and its investment in a new distribution centre in Sydney, which enabled the company to take advantage of the increased demand by shipping more books than ever before. Booktopia recently reported that its academic and corporate book sales for the current financial year to date are running 30 per cent higher than the previous corresponding period, with sales of $53 million to date.
Earlier this month, Booktopia struck a partnership with the student portal Zookal, extending its exposure to the lucrative and growing educational book market. Booktopia will handle the sourcing, supply and distribution of Zookal’s book sales, and the deal – which covers 185,000 titles – could add $22 million to its revenue in FY22, an increase of just over 10%.
Booktopia grew its active customers by 25% in the December half, to 1.71 million, and its customers are spending more: the average annual spend per customer jumped almost 20%, from $103.32 to $123.57. BKG is a stock doing a lot right, and analysts think it’s very cheap.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.
