Kogan Earnings: More Cost Efficiencies To Grow Profits While Macro Headwinds Persist

We were astonished by the severe selloff in no-moat Kogan KGN shares following a mostly known fiscal 2023 result. We ascribe the market’s reaction to a muted short-term outlook. Shoppers are still reining in their discretionary spending, and management cited gross sales growth is more likely to strengthen in the second half of fiscal 2024. We taper our fiscal 2024 earnings estimate, adopting a more cautious outlook on fiscal 2024 gross sales growth of 2%, down from 7% before. We also expect more muted operating leverage and reduce our near-term underlying EBITDA margins to 5% from 7% previously. However, our longer-term earnings estimates from fiscal 2025 are largely unchanged. The valuation impact of the weaker near-term outlook is immaterial after offsetting it by the time value of money effect. Shares screen as significantly undervalued compared with our unchanged AUD 10.70 fair value estimate. The market appears more cautious than us on Kogan’s ability to expand profit margins, or its long-term growth potential, which we expect to be underpinned by a structural shift to e-commerce.

Apart from a challenging macroeconomic environment, management’s update on the outlook for fiscal 2024 is encouraging. In July 2023, adjusted EBITDA was AUD 3.5 million, up over 130% on the previous corresponding period. Management anticipates monthly profits to build incrementally. Further cost efficiencies are expected to drive EBITDA margin expansion, while the top line is supported by a recent acceleration in Kogan First subscriptions, as well as income generated by the new advertising platform for third-party marketplace sellers to increase their prominence. The marketplace has also been introduced in New Zealand, along with other new verticals further diversifying earnings. Our revised adjusted EBITDA estimate of AUD 40 million implies average monthly earnings remain around July 2023 levels for the remainder of fiscal 2024.