Small Caps | Dec 10 2020
This story features ADORE BEAUTY GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: ABY
In its first trading update since listing, Adore Beauty has upgraded revenue forecasts, citing strong patronage of November promotional campaigns
-Wide product range and online capability
-Significant operating leverage
-Focus on benchmark margins and less discounting
By Eva Brocklehurst
Recently-listed Adore Beauty Group ((ABY)) stands to gain from unrelenting momentum in online shopping in the $1.2bn personal care product space, raising awareness through both marketing initiatives and customer engagement.
In its first trading update revenue estimates for the first half have been upgraded to $95.2m from $89.0m in the prospectus, as the November promotional periods of Black Friday and Cyber Weekend were ahead of expectations.
Morgan Stanley awaits further clarity on gross margin impacts, noting Adore Beauty did not update prospectus operating earnings (EBITDA) forecasts. The broker, maintaining an Overweight rating and $8.35 target, suspects the company is prioritising growth, given the online migration of beauty products is in its early stages.
Shaw and Partners notes the extension of Victorian lockdowns augmented online sales and this would have been difficult to forecast in the prospectus. The broker believes the impact of improved revenue at the operating earnings line is under-appreciated, given there is significant leverage in the business.
UBS asserts online retailing of personal care products is a robust business and Adore Beauty will gain market share to the detriment of department stores. The broker's confidence is supported by the compnay's wide product range and the strong online capability. The main opportunities lie with lifting brand awareness through marketing initiatives and expanding the active customer base.
UBS expects 27% sales growth over FY20-25 although, given a one-year forward enterprise value/sales ratio of 2.7x, initiates coverage with a Neutral rating and $6.20 target. Operating earnings margins are forecast to lift to 8.8% in FY25 from 4.1% currently, expected to occur through increased scale, which in turn provides buying power as well as operating leverage.
The broker's calculations of retail peer margins show the highest are around 10%, generated by Kogan.com ((KGN)) and global personal care product leader The Hutt Group.
Shaw, in its analysis of omni-channel and online peers, suggests discounting is both pronounced and frequent at competitor outlets compared with Adore Beauty. Instead, the company prefers to focus on benchmark margins via supply rebates and volume discounts, and does not have to discount as frequently.
Shaw also points out, while competitors are chasing price, Adore Beauty is filling gaps in the market and creating stand-alone and independent products. Management aims to launch its in-house brands in the second half of 2021 which should provide improved margins.
Hence there is little overlap with omni-channel retailers. The company does rely on key supplier relationships, and the broker acknowledges a risk that the brands Adore Beauty stocks could be subject to exclusivity arrangements with competitors in the future.
The company has now launched a mobile app which the broker expects will ramp up quickly as downloads accelerate into Christmas. The app provides more fluid payment options, which should further expand the offering.
Adore Beauty is a 100% online retailer with a large addressable market that remains very fragmented, making it well able to obtain further market share and pursue scale, Shaw and Partners concludes. There is minimal debt and the broker finds the risk/reward compelling, retaining a Buy rating with an $8.30 target.
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