Booktopia Group: Costs become the antagonist in the 1H22 story

About the author:

Steve Sassine
Author name:
By Steve Sassine
Job title:
Associate Analyst
Date posted:
24 December 2021, 9:00 AM
Sectors Covered:
Diversified Financials

  • Booktopia (ASX:BKG) has provided a pre-Christmas trading update, which put into focus the extent to which the COVID-impacted environment has had on BKG’s operations (i.e. elevated costs rolling into 2Q22, distribution bottlenecks etc).
  • It was a disappointing update in our view, with 1H22 revenue (greater than A$127m) and EBITDA (range of A$4m – A$4.5m) guidance well under our estimates.
  • We downgrade our FY22F/FY23F/FY24F EBITDA estimates by ~25%-41% factoring in todays’ update/guidance. Our DCF/Multiples-based derived valuation and price target is lowered to (login to view).
  • Whilst elevated costs continue to impact short-term margin performance, we do however see longer term upside from BKG’s potential market share wins, DC automation as well as growth in its publishing services unit. We retain our Add recommendation on valuation grounds.

Trading update disappoints

Booktopia (BKG) provided a pre-Christmas trading update to the market, which in our view, highlighted the extent to which the 1H22 COVID-impacted environment had on BKG’s operations (e.g. elevated costs, distribution bottlenecks etc).

Management provided 1H22 guidance on the business’s key headline metrics, which were well under both consensus and our estimates.

The details and analysis

Revenue is expected to be above A$127m (~+13% on pcp) this was ~12% under our 1H22 revenue estimate of ~A$144m. Gross profit margins are in line with pcp (~27.5%, which was ~200bps below our 1H22 estimate), with 1H22 EBITDA guidance (A$4m – A$4.5m) being the big miss versus our forecast of ~A13m (as costs remained elevated).

Broadly, the EBITDA guidance range was disappointing, in our view, when framed against recent AGM commentary that said margin impacts from the additional expenses over 1Q22 would not be significant.

On expenses (Morgans 1H22F opex growth = ~32% on pcp), we note the 1H22 margin performance will be impacted by elevated operating costs (additional labour costs due to COVID lockdowns, the ongoing set-up costs of the second distribution facility and higher employee expenses with new executives onboarded).

At the higher end of the EBITDA guidance range, we are now forecasting a ~3.6% EBITDA margin vs ~7% in pcp).

Other details to note include:

  1. Positively, BKG is seeing record daily volumes and from 1 Nov to 21 December had shipped ~1.5m units (daily avg of > 40k) versus 1.35m units in the pcp; 
  2. Both traffic and average order values in the period were up 7-8% on pcp respectively, highlighting improved customer engagement;
  3. Commentary suggested that the majority of issues related to the lockdown have been resolved with expectations that the new facility will help alleviate supply chain/distribution issues.

Forecast and valuation update

We have downgraded our FY22F/FY23F/FY24F EBITDA estimates by ~25%-41% factoring in todays’ update/guidance (with the additional costs tempering our EBITDA margin forecasts, the FY22F EBITDA margin is now ~4.4% vs the previous 7% estimate).

Our DCF/Multiples-based valuation and price target falls to (login to view) on the above earnings changes as well as a de-rating in the comparable multiples used.

Investment view

Despite current costs headwinds and the ongoing COVID environment impacting operations, 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 distribution facility and heightened labour costs remains a short term drag on earnings, we do anticipate medium term margin gains through DC automation and growth in BKG’s publishing services unit. Add maintained.

Risks

Cycling COVID lockdown benefits, inability to extract expected margin expansion, increased competitive intensity, book retailing low growth industry, M&A risk.

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Disclaimer: 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.

Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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