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If you spent $10k on KGN in Mid-March, it is worth over $22k now

  • May 14, 2020 05:47 PM AEST
  • Team Kalkine
If you spent $10k on KGN in Mid-March, it is worth over $22k now

Prices of KGN are reaching levels seen two years back. Presently, the stock is hovering around its 52-week high levels. As good companies also get sold along with the bad ones amid market crash, KGN also touched a low of $3.79 on 16 March 2020, and yesterday on 13 May 2020, the stock closed $8.66 – equating to a gain of ~128%.

Gold MTF non-AMP

One must also remember that promising business models recover faster than the average markets, which is why the stock of Kogan.com Limited (ASX: KGN) has even surpassed the price levels seen at the beginning of the year.

People who had invested in KGN for a long time did face a test in January 2020 – when Kogan.com failed to meet the market expectations. Starting from mid-January, the stock continued a downward trend until mid-March.

Accelerated shift to digital and growing competition…

In March, market participants probably looked at potential of the Company, as the shift to online channels only accelerated after COVID-19 hit the shores. And, it is not Kogan that has been gaining traction.

Over the past month, ASX:RBL is up by around 70%, while ASX:TPW is up by around 76% over the past six months.

Meanwhile, it is apt to note that online retail competition is increasing rapidly, and post coronavirus, competition is likely to get fiercer, as individual companies enhance their capabilities to service the customer digitally.

Renowned large retailers are providing omni-channel retail experience already. It is not just limited to apparel retailing. Every retailer is trying to improve its digital capability and investments are being made into digitally enabled infrastructure.

At the same time, large overseas companies are already plying trade domestically. Painting a rosy picture about the online retail industry seems appropriate given the push induced by COVID-19, but the notion that companies could be huge and successful will likely depend on factors, including sustainable competitive advantages, capital allocation decisions and agility.

Since economic contraction is inevitable now, job losses are pegged to soar higher, which makes the consumer look for value while shopping. Large companies with pricing power and ability to take hit on margins are likely to lure customers with large discounts, possibly at the expense of small and growing companies.

Agility of the management team and their ability to solidify long-term fundamentals of the business would serve the purpose while navigating potential implications that are set to knock at the doors over near term, primarily due to bleak economic picture.

Capital allocation decisions for the management of retailers are going to get increasingly complicated now – as they need to decide on opening a new store or an online fulfilment centre, for instance.

An emerging trend in the industry drives a greater need for reinvestments by the businesses, which is likely to induce pressure on companies whose cash flows are less resilient.

As a result, businesses with lacklustre cashflows to fund growth initiatives would look for additional funding, which could be equity or debt. For companies, whose share prices are trending at higher levels, it is better to raise capital through equity due to less dilution and more cash.

Adding some more debt to balance sheet for growth initiatives is not a bad idea at a time when interest rates are record low, but the terms of deal should be favourable for the business over the long term.

Kogan.com has been diversifying business already…

KGN has been tapping unconventional areas for a typical online business. Its capex light business model, amongst other features, has enabled the management to pay more dividends than the capital raised through IPO, which was in 2016.

Kogan is a time-tested business in the e-commerce ecosystem of Australia after its humble beginnings in 2006. It has adopted a partnership model to introduce itself in other categories like Internet, Mobile, Super, Insurance, Home Loans, Cars, Energy, and Health.

Recently, KGN provided an update on trading in April 2020. It added 139k new customers during the month. Compared to April 2019, the Company’s gross profit was up over 150% and gross sales were up by 100%.

In the March quarter, the business grew gross sales by over 30% compared to the pcp. Revenue growth of more than 6% translated to gross profit growth of over 23%.

It was witnessing strong demand from sellers to get onboarded on the platform, possibly indicating the transitions of brick and mortar businesses to digital, as health care measures imposed by Government impacted people movement.

KGN intends to grow the active customer base and strategic marketing initiatives were launched to capture a large chunk of Australians who were embracing online retailing in the face of COVID-19. The Company considers brand building and increasing active customer base as strategic priorities for long term.

This month grants under Long-Term Incentives plan were issued to CEO and CFO of the Company. While important terms are yet to be finalised, CEO has been given 3.6 million options and CFO has been given 2.4 million options.

Conditions that were reported include executives to be committed with the firm until the approval of FY23 financial report and exercise price will be based on 3-month VWAP ended 30 April 2020.

On 14 May 2020, KGN last quoted at $ 8.550.

 

 


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