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Treasure Chest: Temple & Webster

Treasure Chest | Nov 23 2022

This story features TEMPLE & WEBSTER GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: TPW

FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Analysts at Goldman Sachs like Temple & Webster’s structural growth opportunity at a time when the market is focusing on near-term headwinds.

By Mark Woodruff

Whose Idea Is It?

Analysts at Goldman Sachs.

The subject:

Back in early September, Goldman Sachs initiated coverage on Temple & Webster ((TPW)) with a Buy rating and 12-month price target of $7.55.

While the share price has fallen around -5% since then, the broker now raises its target to $7.60 and still sees an emerging structural growth opportunity that is underappreciated by the market.

The analysts are comfortable with their above-consensus revenue forecasts in FY23 for modest year-on-year growth and expect a return to double-digit growth over the forecast period.

Goldman Sachs views Temple & Webster as a category leader among e-commerce retailer peers, with the broadest product selection across homewares, home furnishings and do-it-yourself (DIY). It’s felt market share may be gained from more premium retailers as consumers search for value in tougher economic conditions.

After a sustainable step-up in the scale of the business compared to pre-covid, the broker believes Temple & Webster is best placed to become the leading online marketplace in the home category. It's felt customers receive a superior customer experience from such a category specialist, which leads to a sustainable competitive advantage over generalist marketplaces.

The growth runway is significant, according to Goldman Sachs, as the company has only around 2% market share. Key drivers of long-term structural growth are likely to be an increase in overall Australian online penetration for the category and wresting a growing market share from a large number of small online retailers.

Importantly, according to the broker, the business has attained a competitive moat via a high-level of brand awareness in a category that is predominately unbranded at the product level.

Addressing the elephant in the room, Goldman Sachs acknowledges the housing-related Discretionary Retail sector faces headwinds, yet, historically, the company has observed stronger demand in periods of a weaker overall housing market as consumers often see online as a value channel.

Also, the company offers similar products at various price points, enabling the capture of customers who are ‘trading down’, explains the broker. The brand positioning as ‘everything for the home’ rather than being a brand associated with a particular price point or sub-category is also considered an advantage in a tough economic backdrop.

More info:

As Goldman Sachs asserts, its positive investment thesis on Temple & Webster is not necessarily shared by other market participants.

A fortnight ago, Macquarie lowered its revenue and earnings assumptions for the company and downgraded its rating to Underperform from Neutral. The target was also lowered to $4.00 from $5.80.

Macquarie was concerned by increasing interest rates, slowing housing turnover and the covid-induced pull-forward of demand in prior periods. FY23 is expected to present tough comparisons against prior lockdown periods in NSW and Victoria.

Also, management’s earnings growth target of 3-5%, up from 2-4%, announced during the presentation of FY22 results in mid-August, could potentially lower marketing spend and the ability to acquire new customers, in Macquarie’s view.

Jarden also lowered its rating for Temple & Webster to Neutral from Overweight just under two months ago, after reviewing independent data indicating a significant swing towards in-store traffic for furniture and homeware retailers.

This broker, which reduced its target to $5.42 from $6.49, felt an omnichannel retailer such as Adairs ((ADH)), which derives around 69% of revenue from physical sales, would be preferred to pure-play online retailers such as Temple & Webster.

In additional research published last week, Jarden further lowered its target to $5.09 from $5.42 after raising the broker's weighted average cost of capital (WACC) assumptions. 

More positively, the analysts pointed to potential medium-term growth opportunities from M&A activity, after management highlighted trade and commercial (B2B) and technology businesses as potential targets.

Three other brokers monitored daily by FNArena -Morgan Stanley, UBS and Credit Suisse- rate the shares respectively Overweight and twice Neutral. Morgan Stanley research tends to have favourable bias towards technology companies and its price target of $7, set in mid-September, is the highest on record.

Jarden is not part of FNArena's daily coverage, and neither is Goldman Sachs. The consensus target (essentially the average of the three above plus Macquarie) is currently at $5.63, but heavily influenced by the inclusion of Morgan Stanley.

The share price is currently trading some -8.6% below consensus target.

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