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Kogan.com Ltd (KGN)

Persuasion comes in many forms. Words are the anvil on which action is struck. And if that action is conflict and drama then it shapes human lexicon.

BLM, iso and pivot are words and phrases taken on new meaning, particularly the last in a commerce sense, as business reacts to new operating paradigms that no-one thought ever existed. Add old fashioned opportunity to create unpredictable experiments.

And that’s exactly what on-line retailer, Ruslan Kogan, of eponymous fame (ASX: KGN) is exploiting with Wednesday’s announcement of a $100 million capital raise. It followed an out of cycle earnings update which had the market wondering what the wily émigré was up to.  

What the Kogan business model showed and Amazon has proved, is the shift to online retail is structural, here to stay, and has just accelerated through the Covid 19 crisis. In the May trading update, KGN sales, gross profit and EBITDA growth in 4Q20 increased +100%, +130% and +200% respectively to April.

For the current financial year EBITDA is tracking up 50% on previous which suggests an earnings range of $45-47 million and Kogan closing fast on FY 22 forecasts of around $52 million. If you were prone to purple prose what is being witnessed is an Amazon like earnings performance.  A 70% dividend payout ratio means KGN is a real payer; proof of free cash flow; that overcomes the hesitation on multiple from those who don’t feel comfortable just chasing Amazon like growth (AMZ’s share price hit a record $USD 2600 high) .

Price targets sit now comfortably in the $14 range. The effective execution, however of Ruslan’s war chest has a big bearing on those targets.   Kogan has driven its cost structure to where it is now globally competitive and able to scale its business without discounting margins. Growth is focused across all e-commerce divisions – there is no cross subsidization, and EBITDA figures are expected to be a record for June, which is typically the calendar years second strongest trading month.  

The scale has added relevance and credibility and Kogan is now partnering directly with big bands like Samsung which has just joined.  Big brands which had said no are now saying yes.

In addition to the capital raise Kogan’s net cash of $33million illustrates how quickly inventory is turning over. Although the company doesn’t believe there is capacity limitation.

The capital raise, priced at $11.45, is a 7.5% discount to market. The opportunity for Kogan was described by one of the stock underwriters as a once in a century opportunity to scale and grow inorganically through ‘distressed’ and ‘going concern’ acquisitions.  Those acquisitions will give Kogan the opportunity to plug product/offering gaps that allows the company to fully capture fundamental shift to online presented by COVID.

Kogan says it looked at many acquisitions over past 4 years and only pulled trigger on one, the furniture wholesaler/ retailer, Matt Blatt. And it sees two types of opportunities, distressed and going concern where value can be added strategically and made more profitable. Principally looking to targets which fill gaps in product offerings and which add to synergies.

The consumer online shopping benefits are obvious – saving time and money. Australians, though haves been a laggards in taking up the online gauntlet compared to USA, China, Europe and UK. So on this premise of consumer uptake, Kogan is pinning its colors to the mast.   

An interesting point about Kogan’s business, and this applies to BNPL (buy now pay later) is they are date businesses, masquerading as e commerce stocks. In this case its optimizing performance over 10 million data points and that embedded analytics is very valuable. Although hard to value.

And it may come to a point where the on-line behemoth, Amazon gets sick of Kegan nibbling away at its lunch and uses a takeover to swat away interference. Largely that depends on how well management executes their acquisitions. Because if history is anything to go by, in this process there is always a slipper or two that gets dropped. The best way, then, for Kogan to predict the future will be to create it. 

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