• Kogan’s share price should be 2.5x times the current share price, says Morningstar
  • Tassie’s MyState Bank is also undervalued despite the recent SVB collapse
  • Data insights company could triple, says Sequoia


Kogan is significantly undervalued

Morningstar believes that online retailer Kogan (ASX:KGN), trading at $3.96 today, is highly undervalued and should have a fair value closer to $10.70.

Analyst Johannes Faul says he sees “the first signs” of improvement in the company’s performance following a period of heavy product discounting.

In its most recent half-year report, Kogan revealed that the company had heavily invested in inventory and operational capacity to meet the significant growth in demand during the COVID-19 pandemic.

As lockdown orders associated with the pandemic eased, the shift in online demand left the company with surplus inventory and elevated operational expenses.

H1 FY23 however represented a half in which the company accelerated the correction of both issues. Group inventory level is now $98.3m as at 31 December 2022. This is compared to $159.9m at 30 June 2022, and $196.8m at 31 December 2021.

Management said the substantial right-sizing of inventory allowed the business to achieve operational efficiencies during the half with a gross profit of $62.9m.

Faul believes these operational efficiencies are set to continue into the second half.

He also says that Kogan may be better positioned than some to stave off competition from larger competitors like Amazon, thanks to its recent expansion to deliver bulky goods to Brisbane, Perth, and Adelaide.

“Although typically lower margin, we consider building a differentiated product offering around big-ticket items as a sound strategy,” Faul said.

“As fulfilment of bulky goods can be challenging to automate and usually requires dedicated handling, Kogan is competing less with Amazon’s fulfilment expertise, and in categories with generally less online competition overall,” he added.


MyState undervalued, not affected by SVB collapse

Morningstar also believes that Hobart-based Mystate (ASX:MYS) Bank is undervalued despite the collapse of Silicon Valley Bank that sent shockwaves through the global banking industry.

Senior equity analyst Nathan Zaia says Australian banks won’t be materially affected by the collapse, and has put a fair value on Mystate at $5.20 (vs the current price of $3.58).

“The full extent of the ripple effects will not be known for some time, but it seems premature to consider this a systemic issue,” Zaia says.

“We do not believe the conditions that allowed a run to happen on SVB exist for the Australian banks.”

Zaia has identifies two key differences between SVB and Australian banks.

“First is the concentration of SVB customer deposits, meaning it takes far fewer customers deciding to pull money out before creating a liquidity event,” he says.

“Second, SVB had a large percentage of their assets held in investment securities, which were out of the money, in contrast to Australian banks which primarily invest in mortgages and corporate debt.”

MyState holds just 0.3% of the mortgage market and may be overlooked by investors seeking banking exposure in favour of the Big Four.

Zaia says the bank is back on track to meet a forecast net profit of $42 million.

“Net interest margin was admittedly much weaker than we’d forecast, but larger average loan balances provided a welcome offset,” he said.

He added that the ongoing RBA rate hikes and the benefit of fixed rate loans maturing at higher rates should act as margin tailwinds for MyState.

Zaia however cautioned that the new loans will, on average, likely be written at a lower margin and offset the benefits.

“We assume loan growth slows to a low single digit by fiscal 2025, which should mean less of a need to price aggressively on customer deposits and small margin reprieve,” he says.


Pureprofile could triple

Broker Sequoia says Pureprofile (ASX:PPL) shares could triple despite forecasting a lower fair value.

Sequoia has lowered its fair value on PPL from 7.9c to 7.5c, but that price is still almost triple PPL’s current share price of 2.9c.

Pureprofile is a global data and insights company providing online research and digital advertising services for agencies, marketers, researchers and publishers.

The company has just delivered record revenue in the first half, driven by strong organic growth in its core Data & Insights business. The business is overall profitable and generating positive operating cash flow. At period end, it had cash on hand of $4.1m, with net debt of around $1m.

PPL has always signalled that the first half would be impacted by the one-off costs of investing in the D&I business internationally, to set it up for future growth.

Based on that one-off nature of the investment made, Sequoia expects a better earnings performance in the second half.

Sequoia also expects PPL to deliver increasing margins in future periods as it continues to expand the revenue base and build scale, whilst maintaining its operating cost structure.

“There is a margin opportunity from reducing the number of less profitable or marginal smaller clients and projects,” said the note from Sequoia.

“PPL margins going forward should also benefit from mix change as the higher margin D&I business grows faster than Pure.amplify Media.”

The downgrade in the Pure.amplify business however is the major reason for the lowering of the target price, says Sequoia.


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