Small Cap Favourites: Kogan.com Ltd
We’ve had a good look at Kogan (KGN) since the IPO and while the price action has disappointed, we aren’t as pessimistic. Those hoping for a quick profit are probably out of the market now and the serious investors are running the ruler over the business. Our conviction is if Kogan can genuinely prove to the market that its current valuation is justified – through merit and results – there will be a slow realisation that this is a business with scale that has plenty of future growth opportunities.
Results are crucial.
The current market value is close to $140m while is tiny compared to the $2.5bn which JB Hi-Fi trades at. Sure, JBH is generating much larger revenue and earnings but it also has much larger contingent liabilities and in retail, you’re only as good as your next sale. We’ve seen the huge downfall in department stores and their inability to adapt because of high fixed costs and a constant need to reinvest cash into updating stores, fitouts and furnishings. Running a physical retailer is tough work and the graveyard is full of failures.
Kogan is barely profitable and one can argue that the market cap is too high based on this. We think the market cap is more a function of optionality. Buying KGN is like buying an option on many things which could happen in the future. Buying KGN is also akin to buying an option that all the profit which JBH generates could be wiped out with a few minor changes to the operating environment. There are a lot of ifs, but we think that KGN has the opportunity to prove everybody wrong…there is a history of doing that by the way.
We’re watching closely.
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Chief Market Analyst
Peter Esho is a member of Invast’s Investment Committee and Chief Market Analyst at Invast Financial Services in Australia. The Invast’s Investment Committee constructs professionally constructed global thematic portfolios of Direct Market Access (DMA) CFDs over highly liquid global shares and ETFs through its new PortfolioInvestor platform. Since 1960, the Invast Group has grown to become one of the largest and most successful global brokerage firms, offering state-of-the-art trading technology and unparalleled service catering to all levels of traders.
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