KOGAN.COM DEF SET shares just stunned the market

What: Shares in online retailer KOGAN.COM DEF SET (ASX: KGN) slumped 17% on their first day of trading since their highly-anticipated initial public offering (IPO).

Investors who partook in the float received shares at a price of $1.80 each. At the close of Thursday’s trading session, the stock had slipped to finish at $1.50.

So What: Kogan is the latest in a string of online retailers to undertake an IPO on the ASX but unlike some of its peers, Kogan has a history of profitability.

In many ways it is better to compare the company to its bricks-and-mortar retail peers JB Hi-Fi Limited (ASX: JBH) and Harvey Norman Holdings Limited (ASX: HVN), rather than to other online only retailers as ultimately this is who Kogan is competing against.

Now What: Kogan’s shares have bounced back just 2% at lunchtime on Friday, but even at these levels conservative investors may not be interested.

The group has revenues of around $200 million which is only a very small share of the consumer electronics market. With a highly-visible brand and the recent acquisition of the Dick Smith online store, there is potential for solid growth in sales to be achieved.

Indeed, the prospectus is forecasting just that – with a rise in sales to around $240 million in financial year (FY) 2017.

However, at the bottom line, margins remain razor thin. FY 2017 net profit after tax is forecast to be $2.5 million, yet even at today’s share price, investors would be paying around $143 million for those profits.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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