3 reasons why Kogan.com (ASX:KGN) shares could be a buy

Kogan.com Ltd (ASX:KGN) is an e-commerce ASX share. In this article are three reasons why it could be a buy at the moment.

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There are a few reasons why Kogan.com Ltd (ASX: KGN) shares may resonate with some investors.

What does Kogan.com do?

Kogan.com is an online marketplace company that sells a wide variety of products including TVs, phones, computers, appliances, clothes, furniture and office supplies.

It’s run by the founder, Ruslan Kogan, and it has grown significantly during 2020. In FY20 it grew gross sales by 39.3% to $768.9 million. In the annual general meeting (AGM) update it said that gross sales increased by 99.8% in the financial year to date for the four months of July 2020 to October 2020, compared to the prior corresponding period.

Kogan.com also sells a number of different household services including mobile plans, internet, energy, credit cards, insurance, pet insurance, life insurance, health insurance and so on.

Here are some reasons why investors may like Kogan.com shares: 

Reason one: New Zealand acquisition

Kogan.com just announced a large acquisition for the expansion into New Zealand. It’s buying Mighty Ape, which is one of New Zealand’s leading online retailers which has a focus on gaming, toys and other entertainment categories.

Before the impact of synergies, Mighty Ape has FY21 forecast revenue of AU$137.7 million, forecast gross profit of AU$45.7 million and forecast earnings before interest, tax, depreciation and amortisation (EBITDA) of AU$14.3 million. This would represent year on year growth in revenue, gross profit and EBITDA of 43.7%, 58.1% and 254.1% respectively.

Kogan.com is paying AU$122.4 million with the purchase payable over four tranches through to the delivery of the FY23 result. Mighty Ape is founder-led, and the founder and executive team will be retained with incentives until at least FY23.

Kogan.com is expecting “significant revenue and cost synergies” across numerous areas of the business.

Reason two: Rising profit margins

When a business can increase its profit margins, it means that more of the revenue will help the net profit after tax (NPAT) line of the financials. Seeing growing profit is one of the main reasons that share prices grow over time and may influence Kogan shares.

Kogan.com can point to a steadily-rising EBITDA margin over the last few years. In FY17 it had an EBITDA margin of 4.3%, in FY18 it had an EBITDA margin of 6.3%, in FY19 the margin was 6.9% and in FY20 the margin was 9.3%.

The e-commerce business said that this demonstrates improving operating leverage and it continues to deliver significant projects to grow its products and services offering, while heavily investing in the platform.

Reason three: Kogan First members and extra services

Kogan First is a membership program that provides a range of consumer benefits, which includes access to free shipping. The idea is also for the business to create stronger loyalty from customers.

The ASX share explained that Kogan First members purchase on average much more often than non-members, which also demonstrates the significant savings available through the loyalty program. The number of paying Kogan First members increased significantly during FY20.

Kogan.com also wants more of its customers to sign up to the other extra services it offers like mobile plans, superannuation or home loans. If a customer signs up to additional services then they become more profitable to Kogan.com on a per-customer basis and it’s cheaper to ‘acquire’ them to use extra services than winning new external customers.

Valuation

At the current Kogan.com share price of $17.30 it’s valued at 27x FY23’s estimated earnings, according to Commsec. It also offers a trailing grossed-up dividend yield of 1.7%.

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Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Kogan.com ltd. The Motley Fool Australia has recommended Kogan.com ltd. 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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