Kogan: Margin Expansion Likely Once Economy Improves

We maintain our fair value estimate on no-moat Kogan KGN at AUD 10.70 per share. Kogan’s first-quarter adjusted EBITDA of AUD 8 million broadly tracks our unchanged AUD 40 million fiscal 2024 adjusted EBITDA forecast. This implies a seasonally strong December quarter and trading in the second half in line with the September quarter. However, our investment thesis hinges on sales growth to accelerate beyond fiscal 2024. From fiscal 2025 we forecast Kogan’s Australian gross sales to increase at an average rate of 7% over the next decade.

Shares screen as significantly undervalued. The market appears cautious over 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. We expect macroeconomic challenges to ease from fiscal 2025, and discretionary spending to recover. We forecast improved consumer sentiment and operating leverage to drive EBITDA margins to midcycle levels of 11%. We forecast marketing costs as a percentage of gross sales to decline as marketing spending within the e-commerce industry normalizes, and Kogan First memberships gradually increase. Also, we expect gross margins to remain structurally higher than before the pandemic, after the exit of lower-margin product lines and due to contributions from Kogan First. In the first quarter, adjusted EBITDA margin, as a percentage of gross sales, was 4.2%. Our fiscal 2024 EBITDA margin estimate is unchanged at 4.7%, including the seasonally stronger margins over the Christmas trading period.

Gross sales declined 6% versus the September quarter of 2022, but increased slightly quarter on quarter. Discretionary spending is in a cyclical downturn, marked by weak consumer sentiment and softening sales across many Australian retailers. Electronics and appliances juggernaut JB Hi-Fi’s Australian sales, including its The Good Guys chain, declined by 5% in the September 2023 quarter.