Temple & Webster (TPW)

Simon Turner

Senior Equity Analyst

8 am 24 September 2020

Prior close: $11.31

A COVID beneficiary in an upgrade cycle

Temple & Webster (ASX:TPW) is a major player in the $14.6 billion Australian furniture and homewares market, and is becoming known as the “Bunnings of furniture”. Whilst the furniture and homewares sector is not known as a high growth sector, TPW has been one of the strongest performers on the ASX over the last three years. The reason why is because the company is a direct play on the retail sector’s shift to online sales, which is being accelerated by COVID-19. Investors have been paying up for businesses at the forefront of this online shift and TPW is one of them.

Online sales represented only 5% of the Australian furniture and homewares market in 2019, and are likely to be 8-9% of the total in 2020 thanks COVID-19. However, Australian online adoption levels are still only half the levels seen in the UK and the US, as shown below.

Source: TPW 2020 results presentation

The opportunity for TPW is significant given the company’s strong online market positioning based on market-leading terms with suppliers, exclusive and private label products, promotional and marketing strengths (including AI-generated room staging ideas), and best in class digital capabilities (including integrated end-to-end tracking of deliveries with freight carriers).

But, after an unusually strong COVID-boosted final quarter of the 2020 financial year, is there more upside left for TPW?

2020 full year result

For the year ended 30 June 2020 TPW’s revenue grew an impressive 74% to $176 million, with 96% growth during the COVID-affected second half when more customers switched to online. As shown below, TPW’s revenue growth in the fourth quarter was almost three times higher than the average for the online retail market, which is very impressiveperformance.

Source: TPW 2020 results presentation

TPW’s gross margin after distribution costs improved from 30.1% to 30.6%. Its contribution margin (after advertising & marketing, customer service & merchant fees) decreased from 15.9% to 15.3%, due to an 89% increase in advertising and marketing costs to $21 million (justified by TPW’s 2.6 times return on marketing investment).

The company’s adjusted EDITDA increased 276% to $8.5 million, reflecting excellent cost control that allowed operating leverage to flow through. Cash flow from operations grew 507% to $25.5 million. The company’s net profit after tax increased 266% to $13.9 million, including an income tax benefit of $5.9 million.

The company ended the year with a net cash surplus of $38.1 million after raising $40 million of equity to “strengthen the balance sheet”. It seems likely the company is positioning itself to make an acquisition in the 2021 financial year.

Change is afoot in the retail sector

After the strong COVID-boosted revenue growth recorded in the 2020 financial year, is a slowdown likely in the 2021 financial year? TPW’s management doesn’t seem to think so. They are of the opinion that what we are currently witnessing is a structural change in the way people buy furniture and homewares (along with many other retail purchases). They expect the trend to accelerate as Australia follows the path of the US and the UK.

Management believes that the new customer habits formed during the lockdown will be further enabledby faster internet and mobile speeds, and new technologies that improve customer experience and increase the sales conversion rate. There is also a demographic tailwind building in the form of millennials increasingly entering TPW’s core demographic, which is expected to accelerate further the shift to online sales.

Outlook

Management flagged that the 2021 financial year has started very strongly, with 161% revenue growth up to 27 August 2020, and the company’s contribution margin tracking above 15%. They also mentioned that EBITDA for July and August will be around $6 million, and that the company’s net cash surplus has grown to $81 million (as at 27 August). The company now has half a million active customers, and is growing its market share rapidly.

The CEO stated, “The advantages of being the online market leader are apparent as we continue to grow our market share.”

Valuation

TPW is followed by 5 analysts, and that number is likely to grow now that the company has a market capitalization of nearly $1.4 billion. EPS upgrades for 2021 and 2022 have been dramatic since the positive impacts of COVID-19 on TPW’s business became known.

Consensus forecasts are for another strong financial year in 2021, with 68% revenue growth and 33% EPS growth, followed by 31% revenue growth and 25% EPS growth in 2022.

Based on management’s update on performance in July and August, these forecasts may be too low. For example, annualizing TPW’s EBITDA from the first two months of the financial year would give 2021 EBITDA of $36 million, 77% above the $20.3 million consensus forecast. That rate is unlikely to be sustained throughout the year, but the potential for further EPS upgrades remains.

At the current share price of $11.31, TPW is trading on a 2022 PE ratio of 55.6 and a 2023 PE ratio of 50.5 based on the current consensus forecasts. However, the true multiples are probably much lower as more EPS upgrades come through.The consensus analyst rating on the stock is Buy.

TPW share price

Source: Metastock, KeyLevels.com – weekly chart with 40 period average.

Conclusion

At face value TPW looks fully priced but further earnings upgrades are likely. The stock is positioned for continued growth due to its strong competitive advantages in online retail.

Risks include the inevitable wind back of government support payments for households, the return of travel spending diverting consumer dollars, and an increase in online competition by other retailers.

Nonetheless, TPW is in a strong competitive position as the online market leader in its field, offering terms and customer experiences that few of its competitors can match.   

Disclosure: The author does NOT hold shares in TPW.

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