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Why Kogan (ASX:KGN) should be on your watchlist at this share price

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The Kogan.com Ltd (ASX: KGN) share price should probably be on your watchlist at the current share price.

Why? There are a few key reasons.

Kogan is one of Australia’s leading e-commerce businesses and it could be a very attractive investment today.

Not only does Kogan have an impressive core online retail offering for consumers in Australia. But it has an a number of other segments including its membership fees, extra services like insurance and mobile plans, its newly-acquired New Zealand business called Mighty Ape and the online furniture business Matt Blatt.

These are some important factors why the Kogan share price could be a good one to consider:

Valuation

The current price/earnings ratio is quite a bit lower than plenty of other growth shares. Some of those aren’t even making a profit yet.  

At the current Kogan share price it’s valued at 25x FY21’s estimated earnings according to Commsec.

This puts the business at a low PEG ratio considering in the half-year result for FY21 it generated 135.1% growth of earnings per share (EPS). The growth may not be as strong in the coming periods, but it’s a good valuation for its long-term growth potential.

Rapid profit growth

One period of growth is one thing, but Kogan has been generating good profit growth for many years. It’s strong profit growth that can lead to outperformance of the market over time.

Kogan delivered net profit after tax (NPAT) growth of 55.9% in FY20. In FY19, net profit increased 21.9%.

The business has been generating double digit growth for quite a while. These odd COVID-19 times has seen Kogan.com’s growth increase. More people are shopping online more often. This is really helping Kogan.com’s sales and margins.

Economies of scale

As an e-commerce platform, the business is getting more profitable as more volume is processed.

That means that the profit is growing at a faster rate than sales increase. This can be seen in every result Kogan has reported in the last few years.

Its gross profit has increased in each of the last few half-year results. In HY18 the gross margin was 19.4%, in HY19 it increased to 19.5%, in HY20 that rose to 22.7% and in HY21 it improved significantly to 27.3%.

The latest result showed lots of margin improvement. FY21 half-year gross sales rose 97.4% to $638.2 million, gross profit went up 126.2% to $112.9 million, ‘adjusted’ earnings before interest, tax, depreciation and amortisation (EBITDA) rose 184.4% to $51.7 million and ‘adjusted’ net profit after tax (NPAT) grew 250.2% to $36.5 million.

Kogan says that it continues to deliver significant projects to grow its products and services offering, while heavily investing in its brands.

Rewarding shareholders

Many ASX tech shares don’t have a sizeable dividend yield. However, for the HY21 result, the board decided to pay a dividend of $0.16 per share – which is a payout ratio of 72.7%. That leaves plenty of profit left for re-investment for more growth.

Kogan has a FY21 expected grossed-up dividend yield of 4% at the current Kogan share price according to Commsec.

Where to invest $1,000 right now

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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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