Kogan.com Ltd (ASX: KGN) ★ ★ ★ ★ ★

Analyst Fair Value: $10.70 (49% discount at 25 January 2024)

Moat rating: None

Despite encouraging improvements in operating earnings, and a meaningful lift in the share price on the 24th and 25th of January, the market still appears cautious over Kogan’s long-term sales growth potential. But we think it will be underpinned by a structural shift to e-commerce.

We maintain our fair value estimate on no-moat Kogan at $10.70 per share. Shares screen as significantly undervalued.

Adjusted earnings before interest, taxes, depreciation and amortisation ("EBITDA") of $22 million for the first half of fiscal 2024 broadly tracks our unchanged $40 million forecast.

While gross sales in the first half were 6% lower than our forecast, gross profit margins remained stable at around 36%. Gross profit increased to some $90 million in the half, up over 40% versus the previous corresponding period, or PCP. This is a significant turnaround in profitability. In the first half of fiscal 2023, Kogan posted a loss of AUD 4 million at the adjusted EBITDA level.

Profit margins were supported by the ongoing mix-shift to more platform or fee-based revenue and less discounting of excess inventory. Kogan generated 63% of its gross sales from its more working capital-light platforms. In fiscal 2022, its first-party gross sales still represented over half of its gross sales.

Another bright spot during the first half was the Kogan First loyalty program. Subscriptions grew to 466,000 by December 2023, up 6% since September 2023, and up 15% from a year prior. We expect Kogan First membership to a generate long-lasting revenue stream if subscribers are retained. Kogan First membership fees accounted for 8% of the group’s gross sales in the half.

Cost-of-living pressures are weighing on sales. In the December quarter 2023, gross sales declined by 5% versus the PCP. We had expected gross sales to rise 6%, as e-commerce growth reignited in Australia. We ascribe the softness in sales to cyclically weak consumer demand, and we don’t think Kogan is materially underperforming its consumer electronics retailing peers.

Kogan’s business strategy is broadly based on low-price leadership. However, as the competitive outlook intensifies from both Amazon and omnichannel retailers, Kogan is adjusting by launching a new online marketplace and building its product offerings in bulkier goods.

Compared with new entrants and most traditional retailers, while replicable we believe Kogan is far ahead on its supply chain, operational automation, IT, and sourcing capabilities. It outsources delivery and uses third-party logistics providers for warehousing but has built a proprietary least-cost routing system that automatically calculates the best carrier depending on the article ordered.

We see great potential in Kogan’s relational business growth through its Kogan First membership model. Kogan First is a loyalty subscription service that allows users to pay less for products and delivery and gives access to exclusive offers. Kogan First has seen impressively fast user adoption since it launched in 2019. As of December 2023, Kogan First had over 466,000 members.