Booktopia Group: Second half tale of margins

About the author:

Steven Sassine
Author name:
By Steven Sassine
Job title:
Associate Analyst
Date posted:
28 February 2022, 9:50 AM
Sectors Covered:
Diversified Financials

  • Booktopia's (BKG) 1H22 result had revenue and EBITDA within management's recently downgraded guidance. Revenue of ~A$130m was up 15% on pcp, with EBITDA towards the lower end of the A$4m-A$4.5m guidance range (A$4.1, -49% on pcp), tempered by elevated employee/Distribution centre costs.
  • Whilst it was a disappointing first half margin performance, in our view by BKG, management commentary suggests that operations have returned to a “more normal environment” post lockdown restrictions easing.
  • We downgrade our FY22F-FY24F EBITDA estimates by ~18%-30% factoring in increased operating expenses. Our DCF/Multiples-based price target is lowered to (Morgans clients login to view) on the above changes and a lowering of multiples post sector/peer de-ratings. We maintain our add rating on valuation grounds.

A challenging first half with cost pressures the focus for 2H22

Booktopia (BKG) released its 1H22 result with the topline and EBITDA within managements recently downgraded guidance. Revenue was ~A$130m, +15% on pcp (vs guidance of > A$127m), with EBITDA coming in towards the bottom of the A$4m – A$4.5m guidance range at ~A$4.1m (~49% lower than underlying EBITDA in the pcp). A net loss after tax of ~A$0.6m was reported.

It was a difficult operating environment in the first half for BKG, with ongoing COVID disruptions and lockdowns impacting its distribution centres (e.g. causing labour shortages and limitations on shipped units etc). However, management commentary indicates that operations have largely returned to a “more normal environment” post lockdowns easing.

The details and analysis

Whilst BKG grew its topline +15% on a record ~4.7m units shipped (avg order value ~A$74), elevated costs in the half impacted EBITDA (margin ~3.1% vs ~7% underlying in pcp). Higher employment costs than anticipated were a key driver of margin compression, with new FTE's and additional DC labour costs (DC wages per units shipped up 16% on pcp to A$1.65) leading to a ~37% pcp increase overall in employee expense.

Marketing costs per unit shipped fell to A$0.97 (from A$1.25 in FY21) as marketing initiatives were wound back in order to maintain customer experience and alleviate DC bottlenecks/distribution constraints that occurred in the half (noting BKG operates out of a LGA that was heavily impacted by restrictions). Marketing expense as a percentage of revenue fell ~60bps on pcp to ~3.5%. We are forecasting some normalisation in 2H22 (rising to ~4.8% of revenue) as BKG enters a key academic season.

Forecast and valuation update

We have downgraded our FY22F/FY23F/FY24F EBITDA estimates by ~18%-30%, with ~10%-13% increases in operating expenses the key driver of the downgrades. Our FY22F EBITDA margin is now ~3.2% vs previously ~4%.

Our DCF/multiples-based price target is lowered to A$1.85, on the above changes and a tempering of medium term EBITDA margins (now ~6%-7% vs previous 7%-8%). We lower our revenue/GPAPA multiples used factoring in the recent sector/peer de-ratings. We currently retain our Add recommendation on valuation grounds.

Investment view

Although BKG was impacted by cost headwinds/DC disruptions in the first half, we continue to believe that BKG will win market share in the A$2.6bn domestic book industry. Whilst the additional spend on the new DC facility/heightened labour costs remain a short term drag on earnings, we do anticipate medium term margin gains through DC automation and growth in publishing services.

However, we acknowledge short-term margin compression and macro/geopolitical issues weighing on market sentiment will need to ease before a potential re-rate in the name.

Risks

Cycling COVID lockdown benefits, inability to extract expected margin expansion, increased competitive intensity, book retailing being a lower growth industry, M&A risk, current global macro and geopolitical environment weighing on market sentiment/increasing volatility.

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Disclaimer: Analyst may own shares. The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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