It’s not surprising that Kogan/Dick Smith’s CEO Ruslan Kogan and chief financial officer David Shafer attempted to offload around 10 percent of the company in June – the changes to the GST from July 1 are likely to challenge the Kogan business model.
Here’s why: The elephant in the room which Kogan persistently points investors and the media away from is that the largest share of its total product sales – over 40 percent – are GST-free out of Hong Kong. That all changes in two weeks.
A spokesperson for Kogan told PhotoCounter: ‘Kogan.com complies with Australian law, and will continue to do so after 1 July. All goods imported from outside Australia that are under $1000 will incur GST from 1 July.
‘At all times, the price displayed on Kogan.com is inclusive of all necessary taxes and duties and there will no additional hidden taxes or charges for customers to pay.’
To respond to the GST changes from July 1, Kogan will either have to:
– reduce its already thin margins on grey marketed products or;
– increase prices in what’s essentially an online bargain basement, thus crippling demand or;
– a combination of both measures.
Whatever tactic Kogan adopts, it will lead to lower demand and/or lower profits in the largest segment of its very price-sensitive business.
Product sales for the first half of the 2017/18 financial year were $213 million, consisting of $91 million in grey-marketed product, $72 million in private label products, and $50 million in branded products sourced locally. (Of the camera companies, only Canon has appointed Kogan an authorised retailer.)
Kogan operates on an after-tax profit margin of somewhere between 3 and 4 percent, and at best this will be on significantly lower sales in future with a big chunk of the ‘Global Brands’ component taken out. The sharemarket might overlook – has overlooked – Kogan’s ordinary earnings performance while it is growing strongly. Lacklustre earnings and falling sales – not so much.
The other insight a quick look at Kogan’s financials provides is that for all the hype and spin, the endless stream of triumphant press releases announcing moves into mobile phones, or health insurance, or travel, these service businesses have generated miniscule sales – probably around the annual turnover of one single Telstra shop or Flight Centre outlet. Kogan made under $4 million in travel sales and under $5 million in mobile phone plan sales in the first half of this financial year.
It’s been an interesting month so far for Kogan. It announced it was going to jump into whitegoods with private-branded products and start a mobile business in New Zealand. The share price rose over 10 percent. A good time to take a profit, perhaps? It seems so, as it was then revealed that Kogan and Shafer were trying to sell a huge parcel of shares – about 10 percent of the entire business! The share price began to dip and then slipped further when they made an announcement that they weren’t selling after all, as they didn’t attract the price they were after. It fell the best part of 15 percent in one day, reducing both Kogan’s and Shafer’s share values by millions of dollars. Then a matter of days later they sold a parcel of 6 million shares for $42 million. Maybe they should have accepted the lower offers when the shares were close to $10 after all. They have certainly done their fellow shareholders no favours in this instance. According to the SMH, the pair had pulled off this stunt before.
Two years ago when Kogan floated on the ASX, PhotoCounter questioned whether the heavy reliance on grey marketed products would prove an Achilles Heel once the GST became applicable on offshore online sales under $1000. There was a reprieve when the change was moved from 2017 to 2018, but even with that extra time, Kogan did not manage to significantly reduce its reliance on the GST-free loophole to generate sales.
The rise in the share price in the last year – from $1.46 to near $10 at its peak two weeks ago – makes little sense. This is dotcom-like overvaluation. By way of illustration, the P/E ratio (price/earnings) is seen as a good measure of whether a share is overpriced or not. A P/E of around 10 could indicate a share is good value, given no mitigating circumstances, while a solid ‘blue chip’ business with great prospects or regular large dividends may operate at higher P/Es because it is low risk. Then there are others where the P/E is high in anticipation of future success.
Kogan’s P/E today is 200 – off the chart – yet it could be its best days are behind it. It’s major ‘USP’ was Kogan HK grey market prices.
COMMENT (From Myriam Robin, AFR, June 13): ‘From the end of this month, customers in Kogan.com’s considerable third-party international sales business (worth 30 percent of revenues at the IPO) will start getting slugged GST, as per the government’s recent reforms. But we’re sure that has nothing at all with the “personal financial commitments” that have caused the founders to sell.’