The Kogan Ltd (ASX: KGN) share price could be an interesting one to think about at the current levels.
What is Kogan?
Kogan is a portfolio of retail and services that includes a large variety of businesses. Here are some of them: Kogan Retail, Kogan Marketplace, Kogan Mobile, Kogan Internet, Kogan Insurance, Kogan Travel, Kogan Money, Kogan Cars, Kogan Energy, Dick Smith, Matt Blatt and Mighty Ape.
It aims to offer those products and services to customers at a low cost thanks to digital efficiencies.
The company says it's focused on making in-demand products and services more affordable and accessible.
Why the Kogan share price could be attractive
1: Cheaper Kogan share price valuation
Over the last six months, the Kogan share price has dropped by around 44%. In just the last three months it has declined by 17%.
That means that the business is not only cheaper, but it could be better long-term value.
In the last few months, Kogan has told investors about demurrage issues, but that has been resolved and does not expect any material demurrage issue to arise in the future.
Management said a key challenge during COVID-19 so far has been managing inventory levels to support its growth and then having too much after building up its inventory levels. That led to higher warehousing costs, and it has also led to increasing promotional activity, which meant a lower near-term gross profit margin and higher near-term marketing costs.
Management expect the business to return to normal levels (relative to the size of the business) and marketing spend as the inventory is reduced.
According to Commsec, the Kogan share price is valued at 23x FY23's estimated earnings.
It's also expected to pay a fully franked dividend of $0.34 per share in FY23. That translates to a grossed-up dividend yield of 4.3%.
2: Operating leverage
Prior to having those inventory issues, Kogan had been demonstrating operating leverage through the business.
In its FY21 half-year result, it reported that gross sales grew 97.4%, gross profit rose 126.2%, earnings before interest, tax, depreciation and amortisation (EBITDA) went up 132.4% and net profit after tax (NPAT) grew 164.2%.
Indeed, in the prior two first half periods, it had seen an increased in its gross profit margin, the contribution margin and the EBITDA margin.
Kogan had been experiencing scale of efficiencies, allowing profit to grow faster than sales. It has been investing in a number of areas for long-term growth. That includes improvements to its logistics network, speed of delivery, range expansion, and improved competition on the platform to improve the experience for customers.
It has pointed out that it's experiencing repeat business from new customers. Kogan said more customers is expected to have ongoing long-term benefits as active customers continue repurchasing.
3: Increasing earnings diversification
The company has been looking to diversify its earnings away from the core Kogan 'exclusive brands' and 'third party brands' offerings. Kogan Marketplace is seeing rapid growth, although this is from a small base. In the third quarter of FY21, Kogan Marketplace saw sales jump 104% year on year to $5.1 million.
In that same third quarter, Kogan Mobile saw growth of revenue of 23.8% to $3.5 million.
One of the biggest things that Kogan has done is buy Mighty Ape, which is a New Zealand business which Kogan said was the number one retail specialist.
Kogan said that Mighty Ape has fast-growing exclusive brands, which are driving margins higher. It also operates its own purpose built distribution centre, allowing room for future growth.
Mighty Ape is already generating a sizeable part of the overall profit. In the third quarter of FY21, Mighty Ape made $6.1 million of the total $44 million gross profit generated across the business.
