1. UK E-commerce Industry Landscape

E-commerce refers to transactions conducted via internet. Moreover, it encapsulates all activities including, online auctions, internet banking, payment gateways, and online ticketing. The U.K. is the most advanced e-commerce market in Europe, with revenues grew by almost double digits in the last five years as customers have embraced online shopping. According to the Confederation of British Industry (“CBI”), UK retail sales had witnessed a marginal drop in July 2021.

The largest segment of the UK’s e commerce market is Fashion. Moreover, the most prominent player of the UK’s eCommerce Market is Amazon followed by Tesco and Argos. These top three stores contributed almost 25% of the online revenue in the UK. Furthermore, the average conversion rate of the UK’s e commerce websites remained around 1.88%, significantly higher than the Asian & South American markets but lower than the industry leaders, Germany, and the U.S. According to a survey by the industry expert, Paypal was the most used online payment method in 2019 as 49% of the shoppers preferred using Paypal, and 37% used a credit or debit card.

The emergence of the Covid-19 pandemic had made 2020 the biggest mobile shopping year to date as the consumers spent approximately 82 billion hours in shopping apps during the year. Furthermore, the mobile business would outpace other digital businesses in 2021. However, it would be difficult to maintain the bumper level of 2020 e-commerce sales momentum in the next few years despite experiencing the accelerated digital shift.

Key Trends in the E-commerce Sector

Risk Exposures to the E-commerce Sector

• Digital Theft & Data Breaches: With a rise in online sales activity post-Covid-19 pandemic, there is also an increase in e-commerce crimes. Moreover, digital criminals sought out innovative ways to target online retailers.
• Brand & Customer Loyalty: Customers always seek the best prices with their favoured brands. For a small store’s long-term success, repeat customers and a loyal customer base are very important. Any small negligence or mishap can force you to shut your doors forever.
• Client Disputes and Refunds: The dispute emerges when the product does not arrive, and the amount has been deducted from the customer’s account.
• Violation of Intellectual Property: Protection of IP is very important in the e-commerce industry and includes website logos, content, taglines, products and other images and icons.

SWOT Analysis

Benchmark Index Performance

Based on the last two years performance, the FTSE All-Share Personal Care, Drug & Grocery Stores index has outperformed the FTSE 100 and FTSE 250. The FTSE All-Share Personal Care, Drug & Grocery Stores index generated a return of about 23.84%; however, the FTSE 100 generated a return of around negative 8.96%, and FTSE 250 generated a return of around 15.37%

Figure 1: Two Years Benchmark Index Performance

(Source: Refinitiv; Analysis done by Kalkine Group)

E-commerce Sector Outlook

According to the recent retail sales report from the Office for National Statistics, the online retail sales had represented almost 26.7% of the total retail sales in June 2021, while it was around 28.4% for May 2021. Moreover, the e-commerce sales now represented roughly 26% of the total retail sales in the UK. On an optimistic note, it would reach nearly one-third by the end of 2024. The UK consumers seek for a smooth online experience in terms of delivery speed, user experience and smooth returns procedures. Meanwhile, the revenue from the UK e-commerce market would be expected to grow at a CAGR of around 3.5% and reach 92.46 billion pounds by 2025. The UK already has a large number of digital shoppers, but still social media is not a common place for shopping yet. Thus, e-commerce companies can penetrate social media platforms and lure customer by offering attractive price and brand value.

2. Investment analysis and stocks under discussion (MONY, MOON, AO.)

After gaining insights into the E-commerce sector, we would look at the business model of three E-commerce players listed on the London Stock Exchange. 

A. Moneysupermarket.com (LON: MONY)

(Recommendation: Buy, Potential Upside: 19.27%, Market Capitalization: GBP 1.41 billion)

Moneysupermarket.com Group PLC (LON: MONY) is an FTSE 250 Index listed company operating as leading UK price comparison sites for Insurance, Money, Home Services, and other products.

On 3 September 2021, the company will pay an interim dividend of 3.1p per share, with an ex-dividend date of 29 July 2021.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group) 

From a technical standpoint, the stock price is hovering around the lower Bollinger band, indicating an upside potential in the stock price.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 19.27% over the closing price of GBX 254.00 (as of 27 July 2021).

B. Moonpig Group PLC (LON: MOON)

(Recommendation: Speculative Buy, Potential Upside: 21.80%, Market Capitalization: GBP 1.45 billion)

Moonpig Group PLC (LON: MOON) is an FTSE 250 Index listed company engaged in online greeting card and gifting business in United Kingdom, United States and Australia and the Greetz brand in the Netherlands. The Group offers its products through its proprietary technology platforms and apps, which utilize unique data science capabilities designed by the Group to optimize and personalize the customer experience and provide scalability.

Share Price Chart (since 02 February 2021)

(Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, the stock price is hovering around the lower Bollinger band, indicating an upside potential in the stock price. The momentum indicator 14-day RSI (~36.71) is also indicating an upside potential in the stock price.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 21.80% over the closing price of GBX 385.00 (as on 27 July 2021).

C. AO World PLC (LON: AO.)

(Recommendation: Speculative Buy, Potential Upside: 14.66%, Market Capitalization: GBP 1.09 billion)

AO World PLC (LON: AO.) is an FTSE 250 Index listed company engaged in selling electrical and delivering them via its in-house logistics network. The company sells electronics across the following categories: major domestic appliances, small domestic appliances, audio visual equipment, computing, mobile, gaming, and smart home technology.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, the stock price is hovering around the lower Bollinger band, indicating an upside potential in the stock price. The momentum indicator 14-day RSI (~40.85) is also indicating an upside potential in the stock price.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 14.66% over the closing price of GBX 222.20 (as on 27 July 2021).

*All forecasted data and peer information have been taken from REFINITIV.

*The reference data in this report has been partly sourced from REFINITIV.

*The "Buy/Speculative Buy” recommendation is also valid for the current price as covered in the report as on 28 July 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Disclaimer 

References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.

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