A great article written today on $tock Head. Copy and pasted as cannot post the link.
Special Report: The ecommerce business has a “demonstrable re-rating opportunity” in the months ahead, Babarczy says.
Online retail businessHarris Technology (ASX:HT8)has a number of unique competitive advantages to scale growth in the years ahead, according to professional investor Julian Babarczy.
The listed ecommerce company has focused on a dedicated reseller strategy, leveraging partnerships with big players such as Amazon and Kogan.com.
Shares in the company rose sharply through 2020, after initially capitalising on demand for urgent inventory items such as personal protective equipment in the wake of the pandemic.
The platform is also a beneficiary of the post-COVID boom in ecommerce activity. But within that structural shift, Babarczy – an investor in HT8 – said its operational advantages leave the stock well-positioned to outperform.
“They’ve emerged from the COVID-19 period as one of the largest resellers on the core ecommerce platforms,” he said.
“And I think a combination of factors leave them ideally positioned now. The company has a very strong brand with an optimised balance sheet, and a tight operational model to scale this business over time.”
He added that in the wake of some strategic capital raises, HT8 CEO Garrison Huang also has a key advantage – flexibility — to execute his business strategy.
“The capital to invest in inventory allows him to respond quicker to online trends. So he’s ahead of the curve to buy inventory he thinks will sell effectively, and get it at the right price to maximise his margins,” Babarczy said.
“In my view, this business has the capacity to grow at circa 10 per cent per quarter from here on.”
In addition, with “the scale it’s now achieved, I think (Huang) can generate EBITDA margins of around 6.5pc.”
And on valuation multiples such as EV/Sales and an EV/EBITDA, HT8’s current share price looks like “compelling value” compared to other players in the space.
“So to me it feels like the value play in the sector, with a demonstrable re-rating opportunity of potentially multiples from where the share price currently is,” Babarczy said.
Amazon advantage
As part of its reseller strategy, HT8 has established a first-mover advantage with the Australian operations of global ecommerce giant Amazon, where it’s already picked up a material slice of the market.
In assessing the Amazon partnership, Babarczy said that growth is reflective of the value-add that HT8 offers the ecommerce giant.
“If you look at the way the two companies align, Amazon is more than just an online shopfront (for HT8),” he said.
“Amazon gives them key warehouse space and takes care of their logistics and fulfilment support.”
“To me it shows they see a lot of value in what Harris does because if Amazon thought it was so easy to pick these trends and buy the inventory, they could do it themselves.”
“But they don’t do that because they recognise Garrison and the HT8 team have a specific skill set to monitor trends in electronics and stay on top of their inventory management.”
With a tight operational model and demonstrated core competencies in inventory management, Babarczy said the Amazon partnership can also open the door to new market segments for HT8 such as the rapidly growing gaming category.
“It’s a demonstration of the fact they run a very good operation and have a strong relationship with Amazon, otherwise Amazon wouldn’t be offering them new product categories to enter into with this unique fulfilment relationship,” Babarczy said.
Key management
For Babarczy, who worked for 14 years at tier one investment firm Regal Funds Management and now heads up privately held Jigsaw Investments, the strength of management is also a key metric when assessing a company’s prospects.
In that context, he said he has a lot of confidence in Huang’s capacity to lead HT8 through its next phase of growth.
“He’s an industry stalwart who’s been around the electronics industry for decades, and experience is critical in this sector,” Babarczy said.
“So he’s got a lot of expertise, and he’s proved it by acquiring the Harris brand and building it into a fully nationalised network.”
“I think one of Garrison’s key strengths is that he’s very hands on. He watches every dollar in the business and there’s no wastage.”
“To me he’s shown the strength to work through phase one which was the turnaround strategy. And now he’s ideally positioned to benefit from HT8’s high growth and add value to shareholders who are happy to come along for the ride.”
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