Stock Report | Temple & Webster Group Ltd

Temple & Webster Group Ltd (ASX: TPW)

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INVESTMENT SUMMARY

  • Work from home accelerates the structural shift to online retail and encourages households to reallocate budgets to furniture.
  • The unprecedented household stimulus will drive consumer spending.
  • Strong trading update showing 74% sales growth, tracking significantly above consensus estimates.

Ticker | ASX:TPW
GICS Sector | Consumer Discretionary
Current Price | A$3.81
12m Target Price |  A$6.00
Upside | 57%
Market Cap | A$432m
EV/Sales | 1.9x
EV/EBITDA | 62.8x


BUSINESS DESCRIPTION

Temple & Webster Group Ltd. operates as an online retailer of furniture and homewares. It provides furniture, homewares, home décor, arts, gifts, and lifestyle products from Australian and international designers. Temple & Webster was founded in July 2011 and is headquartered in Sydney, Australia.


INVESTMENT THESIS

18 June 2020 Trading Update

TPW reports 2H20 sales growth accelerating from +74% in April to +90% YoY to date.

This trading update has validated our thesis that social distancing has accelerated the sales growth of TPW. We believe TPW remains materially undervalued as its relative price movement since the start of expectations of social distancing has lagged pure-play online peer Kogan.

Buy reaffirmed. Price target raised to $6.00 (previously $4.60).

Benefits from Work from Home

Social distancing measures have encouraged businesses to work from home where possible, driving demand for additional office furniture. The benefit towards TPW is compounded by lockdowns and closures of brick and mortar retailers. As physical stores close, consumers must turn to online alternatives such as TPW which is a pure-play online retailer.

Google Community Mobility data shows travel to workplaces in Australia dropped by ~40% during April and is currently -27% lower as lockdowns ease. Comparatively, travel to residential areas was the only category that has experienced growth.

We believe social distancing measures have increased demand for furniture as consumers refit their homes for working or renovations. Demand has been particularly strong online given physical store closures, forcing consumers to migrate online alternatives, some for the first time. Competitors have underinvested in their online offering, with Nick Scali only launching their online store in April 2020.

Given the historical stickiness and convenience of e-commerce, the shift to online retail has been dramatically accelerated and we see earnings for TPW also accelerating materially.

Source: https://www.gstatic.com/covid19/mobility/2020-05-02_AU_Mobility_Report_en.pdf

Benefits from Unprecedented Household Stimulus

The direct fiscal stimulus for Australia in response to COVID-19 is estimated to be 10.6% of GDP or the second highest globally to date. Comparatively, the GFC stimulus package was 1.8% of GDP in 2008-09. COVID-19 stimulus includes direct household payments such as

  • A one-off $750 payment to most welfare recipients, and
  • An additional $550 a fortnight to most welfare recipients, and
  • Expanded eligibility for unemployment benefits; and
  • $1,500 a fortnight wage subsidy for affected businesses.

Consequently, households and consumers will have sufficient spending power, some more than pre-COVID-19, to purchase furniture.

Strong Trading Update

Management provided a strong trading update on 28 April 2020 that revealed sales growth of 74% YoY with a record number of new and repeat customers. This is consistent with our thesis that work from home and household stimulus has driven significant demand for online furniture retailers such as TPW.

Website traffic data also shows a surge in April (+69% MoM), consistent with what management has reported.

Strong YTD performance has also been driven by the unprecedented bushfire season which also drove online furniture retail demand given physical store closures in bushfire affected areas and the need to replace furniture. Consequently, TPW experienced higher website traffic in January, which is seasonally a quieter month, compared to December which is the seasonally busier Christmas period.

TPW also reported a strong first half in February with sales up 50% YoY driven by market share gain which we believe has now accelerated. Online penetration for the Australian furniture market was estimated to be ~5% in 2018 compared to ~15% in the US and UK, presenting a long runway of growth for TPW.

Online retail peers have also reported strong results. Since February 2020 highs, Kogan (ASX:KGN) has rallied 62%, Amazon (NASDAQ:AMZN) has rallied 9%, eBay (NASDAQ:EBAY) has rallied 8% whilst TPW has fallen 10%.


CATALYSTS

Household Stimulus Payouts (May 2020)

Additional JobSeeker and JobKeeper payments are expected to commence being paid out over these two weeks. We expect these payments to further drive sales for TPW which should reflect in strong website traffic for May and another strong trading update.

FY20 Results (August 2020)

A fuller picture of the positive impact of work from home and household stimulus will be reflected in the full-year results for FY20. Consensus expects 58% sales growth, accelerating from 50% growth in the first half, which we believe is very conservative.


VALUATION & PEER COMPARISON

Relative Price Movement

Since February 2020 highs, Kogan (ASX:KGN) has rallied 62%, Amazon (NASDAQ:AMZN) has rallied 9%, eBay (NASDAQ:EBAY) has rallied 8% whilst TPW has fallen 10%. We believe that the lag in the share price of TPW is unjustified given that TPW has confirmed sales growth has accelerated from 1H20, contrary to what consensus was expecting. Given that TPW has also greatly benefitted from the shift to online retail being accelerated by social distancing, we expect TPW to rerate and track its online peers.

Our target price of $4.60 assumes that TPW should be trading at least 10% above its February highs, in line with online retail peers. This is well below the 62% rally Kogan has experienced.

Forward EV/Sales Multiple

On a forward EV/Sales multiple, TPW is undervalued compared to other online and furniture retailers when adjusted for forward sales growth based on consensus estimates which we believe are conservative. Extrapolating the 74% sales growth this half into the next twelve months results in a valuation well above our $4.60 target.


INVESTMENT RISKS

Unusual $15m Block Trade

On the day of the trading update, Macquarie Group exited their $15m holding in TPW through a single block trade at $3.60. However, no notice of substantial holding from another party has been lodged since. Thus, we believe the block trade was potentially a short position being covered on behalf of clients rather than an institutional investor exiting their position.

Reopening of Physical Stores Faster than Expected

Brick and mortar peers (Adairs and Nick Scali) have flagged they expect to reopen stores over the coming months as lockdown measures ease. An absence of second wave infections and the availability of a reliable COVID-19 will accelerate reopening. However, we expect these scenarios to be unlikely and consumers to continue to be averse to physical store visits and shop online when convenient.


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