Kogan Versus The Share Market

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Online retailer Kogan (ASX code: KGN) listed on July 7 for $1.80. It is reported that the IPO was 4 times oversubscribed. That means one of two things:

  1. those who wanted a piece of the action wanted a lot of the shares on offer; or
  2. there were just lots of investors wanting a bit.

The price since listing tells us it was the first. Fewer investors wanting big chunks and I’d wager a lot of those were expecting the “Kogan” brand to drive investor activity in the secondary market (ie; buying it the share market after it listed).

So, 24 hours after listing why is it down 17%?

The reality is in…. well, the reality.

Kogan for all it’s growth and market penetration will turn a EBITDA of just $2.9m in 2016. Post issue Kogan has 93.3m shares on issue. That amounts to a return $0.027 per share. So, spend a $1.80 for 2.7cent return. At that rate, it’ll take 67 years to get your money back (assuming zero growth).

The story improves a little in 2017 where EBITDA is predicted to grow to $6.9m which takes your return metrics to 24 years. That’s more acceptable for a company with good long-term growth prospects and a history of achieving bottom line growth (not just top-line revenue growth).

That is where I have concerns. In 2015 Kogan barely grew. Sales growth was meagre and profitability slipt. 2016 has righted some of that ship but Kogan didn’t hit its targets. How does that give us confidence that it can achieve its 2017 growth and thus justify its lofty price?

Today (8 July) KGN trades at $1.54. At that price the 2017 P/E is 21x (or more given I’m basing it on EBITDA and not net profit – basing it on net profit makes it worse)

Now all that is bearable but we then turn to enterprise value on EBITDA (EV/EBITDA) Kogan was listed at 48x. To put that in perspective, Harvey Norman trades on 9x. It’s way out and that concerns me.

I’d argue that as a minimum Kogan needs to hit it’s forecasts otherwise the share price will feel a further wrath of the market and if I were a betting man, my money would be on that outcome.

On face value Ruslan Kogan and his advisers have pulled the swindle of the year. The hype of the brand seems to have blinded the reality of the offer. It was overpriced and I feel sorry for those who purchased this on the ‘advice’ of their advisers or stockbrokers. The markets have seen it for what it was.

If you want to buy KGN I would wait for proof they can achieve their targets.

Nick Rundle is Investment Adviser for Accession3 Financial Advisers. AFSL 331990 ABN 72 840 807 122. He can be contacted on 4613 0311. This article is general information only and is not intended as personal advice. Speak to your financial adviser or stockbroker prior to taking any action.