Loan

Recommendation
for Kogan
Yash Kolli – Kirsten Fong – Biying Xiao
Obadah Meqdadi – Don Tran
 Financial
Overview
Performance

Financial Position Risk Analysis

Agenda
Comparative Final
Recommendation Q&A
Valuation

Presentation Title
2
Overview
 Founded in 2006 by Ruslan Kogan

 Expansions into the online retail space in 2011 due to

growing competition

 Partnership signings in 2017 landed Kogan exclusive

subsidiaries e.g., Kogan insurance

 Revenue primarily generated from sales of electronic

goods + subsidiaries – Kogan Mobile etc.

 Price-conscious & tech-savvy consumer base

 Male-leading base chiefly of ages 18-40

3
A RATIO Financial
ANALYSIS

Performance
Profitability – Return on Assets
Return on Assets 2019-2022
 Declining ROA → reduced efficiency of asset utilisation 1.6

 Negative ROA (2022) → Kogan generated a net loss after tax

1.4
 Significant outlier outside industry average (-9.8% for Kogan
1.2
vs 12-15% for Harvey and JB Hi-Fi)
1
 Contrasting JB Hi-Fi and Harvey Norman, Kogan reported a
declining ROA over time 0.8

0.6

0.4

0.2
 Weak, declining financial performance
0
2019 2020 2021 2022
 Against decision to continue borrowing loan
Series1 Series2 JB Hi-Fi

5
 Profitability – Return on Equity
Return on Equity 2019-2022  Declining and negative ROE → reduced rate of return on
1.6 shareholders’ equity

1.4  Very low ROE (-20.5% in 2022) → significant outlier

compared to industry acceptable range of 20-40%
1.2
 Similar declining trend in ROA, ROE for Kogan in contrast
1
to increasing trend by Harvey Norman and JB Hi-Fi
0.8

0.6
 Kogan may require price adjustments to improve
0.4
profitability
0.2

 Weak, deteriorating financial performance

0
2019 2020 2021 2022

Series1 Series2 JB Hi-Fi

 Against decision to continue borrowing loan

Presentation title 6
 Inventory Mismanagement – Reduced Profitability

2022
Subdued sales led to
accumulation of excess
inventory which Kogan
sold at a discounted price
to prevent deterioration.
Net operating loss →
2020 decline in ROA + ROE
Covid-19 pandemic
led to a surge in
online shopping, 2021
causing Kogan to Expectations of
experience a 55.9% sustained increase
increase in net profit in sales cause
after tax and doubling Kogan to purchase
in sales more inventory,
however this
expectation was
not met

Presentation title 7
Profitability Analysis – Gross Margin Ratio
Kogan - Gross Margin Ratio  Declining Gross Margin ratio  reduced ability to generate
1.6 profit
 2nd highest Gross Margin when compared with peer
1.4
companies.
1.2
 Below Industry Average of 28.4%

1  Sharp decline:
 High cost of production
0.8
 use of discounted pricing
0.6  Inefficient operating practices

0.4

0.2  Gross Margin below industry average

0
2019 2020 2021 2022
 Weak, declining profitability

 Against decision to continue borrowing loan

8
A RATIO Financial
ANALYSIS

Position
 Liquidity Ratio Analysis - Current Ratio
 Liquidity Ratio declining Kogan - Current Ratio
1.6
 Current Ratio lies within acceptable range of
1.4
1.5-3
1.2
 high current ratio when compared with other
1
companies.
0.8
 Reduced ability to finance current liabilities
0.6
 Over reliance on inventory = 68% Kogan’s 0.4

current 0.2

0
2019 2020 2021
 Decreasing current ratio

 Against decision to continue borrowing Liquidity Kogan Myer Harvey JB Hi-Fi

loan Current 2.01 2.01 1.70 1.26

Presentation title 10
 Liquidity Ratio Comparison - Quick Ratio
Kogan - Quick Ratio
 Quick Ratio significantly declined
1.6
over reliance on inventory, forming 68%
1.4

1.2 of Kogan’s current assets in 2022.

1 insufficient quick assets to meet its short-
0.8 term obligations.
0.6

0.4

0.2

0
2019 2020 2021
 Decreasing quick ratio

 Against decision to continue borrowing

Liquidity Kogan Myer Harvey JB Hi-Fi
loan
Quick 0.83 1.39 1.21 0.5

Presentation title 11
Financial Structure - Debt to Equity
Debt to Equity Ratio 2019 - 2022
 Large fluctuations → halving from
1.6

1.32 in 2019 to 0.71 in 2020 then

1.4
doubling to 1.44 in 2021
1.2
>1 → Attributed to aggressive debt-
1
driven expansion in recent years,
acquisition of Mighty Ape 0.8

Consistently higher than competitors 0.6

In 2021, Kogan’s Debt to Equity was 0.4

3x that of industry accepted range 0.2

(1.55 vs 0.5)
0
2019 2020 2021 2022

Series1 Series2 JB Hi-Fi Myer

12
Debt to Equity impacted by increased debt
levels

Debt levels should remain sustainable as Kogan returns to positive

operating cash flow

A weakened balance sheet and financial position → rising interest rates a

concern on loan borrowing

Future capacity to manage liabilities dependent on ability to convert EBIT

to Free Cash Flows

13
 Activity Ratio Analysis - Inventory Turnover Ratio
 Overall Activity Ratios has decreased Kogan Inventory Turnover Ratio
 Low inventory turnover ratio 5

4.5
 Below industry average of 5-10
4
 inventory might become obsolete or deteriorate
3.5
Slight improvement in 2022 due to: 3

 marketing strategies 2.5

 discounted pricing 2

 Sold 159.9 million inventory at June 30 to 98.3 1.5

1
million
0.5

0
2020 2021 2022

 Declining inventory turnover ratio

Activity Kogan Myer Harvey JB Hi-Fi
 But showing great improvements in 2022
Inventory 3.83 3.52 4.31 10.47
Turnover
Presentation title 14
Risk Analysis
The Kogan First Loyalty Program

15
 First Loyalty Program:
Imbalanced benefits
Click icon to add picture
Kogan Standpoint
 Revenues inflated by 73.4% year-
on-year to $15.5 million
 $20.5 million to execute the
program
 Operated at a $5 million or 32%
loss in FY22
Customer Standpoint
 Premiums including free shipping
and exclusive deals
 Subscriber benefits amounted to
$20.5 million
 Subscriber count tripled year-on-
year to 372,000 in FY22
16
Direct impacts on Profitability Ratios
Gross Margin

Costs outweigh revenue produced → Reduced gross profit & increased sales → Overall decline in gross margin ratio

Reduced gross profit leads to lower operating profits after tax, in turn adversely affecting:

Profit Margin
Given their alarming 2022 profit margin of 3%, this could result in unprofitability in the near future

Return on Equity (ROE)

Lesser rate of return when utilising the same total of shareholder’s equity

Return on Assets (ROA)

Inefficient utility of assets to bloom profits
17
 Cu
Indirect Effects –
rr
Ass ent
et s
Liquidity and Solvency
Reduced current assets (e.g. cash) to fulfill program costs

Potentially
Liquidity Ratios – Weakened Solvency Ratios –

Current, Quick & Cash Debt to Asset & Leverage

Results in

Difficulties paying off current debt and

sustaining operations long term
18
 EQUITY
AND FIRM
MULTIPLES Comparative Valuation
 Selection of Comparatives

Kogan Myer Harvey Norman JB Hi-Fi

DID NOT: INSTEAD WE:

 Select other online retailers e.g. eBay and Amazon  Opted for similar retail companies
 Polarities in business and financial profiles (e.g. size)  Closer resemblance of Kogan’s portfolio
 At risk of inaccurate valuation  Heightened likelihood for accurate valuation
20
Equity Multiples – P/E & P/S
Myer Harvey Norman JB Hi-Fi Total

Market 0.70 4.57 4.98 10.25

Capitalization
(MVE) ($B)
Weighted
Average (BMC)

P/E Multiple 21.46 6.12 8.49 8.32

P/S Multiple 0.25 1.63 0.52 1.00

BMC – By Market Capitalization

21
 Equity Multiples – Kogan Valuation
Based on Based on Based on Based on
Myer Harvey JB Hi-Fi wt.avg
Norman Sales – 574.52M
MVE est. 81.98M 23.38M 32.43M 31.78M
based on Earnings (2021) – 3.82M
P/E
multiple Shares Outstanding – 107.08M
Price per $0.86 $0.24 $0.34 $0.33
share est. Earnings Per Share – $0.04/Share

MVE est. 143.63M 936.47M 298.75M 574.52M

based on
P/S
multiple
Price per $1.34 $8.75 $2.79 $5.37
share est.
22
Firm Multiples – EV/EBITDA & EV/Sales
Myer Harvey Norman JB Hi-Fi Total

Enterprise Value 1.82 5.92 3.95 11.69

(EV) ($B)

Weighted
Average (BEV)

EV/EBITDA 6.48 5.64 4.34 5.33

EV/Sales 0.66 2.11 0.41 1.31

BEV – By Enterprise Value

23
 Firm Multiples – Kogan Valuation
Based on Based on Based on JB Based on
Myer Harvey Hi-Fi wt.avg
Norman Sales – 574.52M
EV est. based 122.47M 106.60M 82.03M 100.74M
Shares Outstanding –
on
EV/EBITDA
107.08M
MVE est. 172.98M 157.11M 132.54M 151.25M
Price Per $1.62 $1.47 $1.24 $1.41 EBITDA – 18.9M
Share est.
Total Cash & Non-operating
EV est. based 379.18M 1.21B 235.55M 752.62M Assets – 85.03M
on EV/Sales
MVE est. 429.69M 1.26B 286.06M 803.13M Total Debt – 34.52M
Price Per $4.01 $11.77 $2.67 $7.50
Share est.
24
Evaluating Estimations
Equity Multiple Myer Harvey Norman JB Hi-Fi Combination
Valuations:
MVE est. based on P/E 81.98M 23.38M 32.43M 31.78M
Per Share Price est. $0.86 $0.24 $0.34 $0.33

MVE est. based on P/S 143.63M 936.47M 298.75M 574.52M

Per Share Price est. $1.34 $8.75 $2.79 $5.37

Firm Multiple Myer Harvey Norman JB Hi-Fi Combination

Valuations:
MVE est. based on 172.98M 157.11M 132.54M 151.25M
EV/EBITDA
Per Share Price est. $1.62 $1.47 $1.24 $1.41

MVE est. based on 429.69M 1.26B 286.06M 803.13M

EV/Sales
Per Share Price est. $4.01 $11.77 $2.67 $7.50
25
Initial Valuations
Valuation Range - Price Per Share
Market Valuation Range – $132.54M -

EV/Sales $1.26B or $1.24 to $11.77 per share

Midpoint Valuation – $696.27M/$6.57

EV/EBITDA
per share

P/S

P/E

0 2 4 6 8 10 12 14

26
  Online retail industry, e-commerce sector
 Consumer electronics, mobile insurance, furnishings, whitegoods appliances,
hardware, homewares, children’s toys
Narrowing  Mid-range consumers, male leading base (58.48% male and 41.52% female) with
ages 25-34 making up the audience majority.
 4 million active customers across Australia and New Zealand with kogan.com.au as
the Range – the leading platform
 First launched in 2006.

Most  Australian retail industry, specifically department store sector

 Womenswear, Menswear, Cosmetics and Fragrance, Homewares, Electrical

comparable Appliances and Furniture

 Mid-range to upscale consumers, female leading base (32.98% male and 67.02%
female) with ages 25-34 embodying most of the consumer base.
company  58 department stores Australia-wide alongside online platform myer.com.au
 12.7% of 2022 revenue came from online sales (highest of 3)
 First opened in Bendigo, Victoria in 1900
 2022 profit margin approx. 45% 27
 Consumer

 Consumer electronics forward  Consumer electronics forward  Consumer electronics forward

 Recent growth in homeware,
furnishings and children’s
toys
 Mid-range consumers, male
leading base (58.34% male and
41.66% female)
 169 HN franchised complexes
in AUS, 43 in NZ with 66 more
globally
 Established in 1982
 Extensions to homeware,
appliances, furnishings and
children’s toys
 Mid-range consumers, male
leading base (58.48% male and
41.52% female)
 4 million active customers across
AUS and NZ
 First launched in 2006
Electronics
 Specialises in the
technological field – Harvey
 Mid-range consumers, male
leading base (64.54% male
and 35.46% female)
Norman or
 213 stores across AUS and
NZ JB Hi-Fi
 Established in 1974

28
 Narrowed Valuation Range
Isolating Harvey Norman as the sole reference point

Market Valuation Range – $157.11M to $1.26B or $1.47 to

$11.77 per share

Midpoint Valuation – $708.56M/$6.62 per share

Presentation title 29
Refining the Global vs Oceanic Demographic
Other than its 212 complexes across Australia and New Zealand,

Valuation Harvey Norman still operates in 66 other complexes globally

Adjustment:

Exclusive focus on Oceanic revenue, disregarding other nations

Retail Franchisor vs Online Retail

Harvey Norman can generate revenue through lending their brand to
franchisees - Franchising Operations: Retail Property

Adjustment:

Discard the revenue created from the retail property segment

30
Calculative Adjustments
To account for globality:
Harvey Norman Profit Before Tax (PBT) – $1.14B
Australia PBT – $553.02M
New Zealand PBT – $129.08M

∴ Proportion of profit belonging to AUS & NZ = = 59.83%

To account for additional property revenue:

Retail Property Segment Revenue – $494.39M
Total Revenue – $2.85B

∴ Proportion of revenue owing to retail property segment = = 17.35%

Leftover revenue (discarding retail property segment) = 82.65%
31
 Final Valuations
Incorporating globality and property revenue adjustments

59.83% x 82.65% = 49.45% scale factor

Final Market Valuation Range – $77.69M to $623.07M or

$0.73 to $5.82 per share
Final Midpoint Valuation – $350.38M/$3.27 per share

Presentation title 32
 Final Recommendation – Don’t extend Loan
Decreasing Return On Assets Negative Profitability
 Decreased 20% since 2020  Difficulty covering expenses
 Indicates at poor efficiency in generating profits  Less dividends received

Debt to Equity Better investment Opportunities

 Financing heavily through debt  Harvey Norman and JB Hi-Fi potential loans
 May not be able to pay off in future  Far more competent profit margins elsewhere

DO NOT EXTEND
LOAN!
Presentation title 33
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listening
Q&A

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