See Copy and paste below.
Kits is about 1 year behind the forecast financials that will value it at $17.
The GreenShields major acquisition of about 2.5 million new eyecare customers should do just that.
In that Report, it is stated that Kits would be generating 25 % of its total revenue from eyeglass sales .
By Q2 of 2022, Kits had already reached 14%.
In Q2, 10% of its customers....74,000 ..bought eyeglasses.
This was slightly more than 10% of its Q2 customers of 700,000.
Blueshiekd will add another 2.5 m customers, which computes, assuming the same eyeglass purchase ratio of 10%, to about 250,000 eyeglass purchases .
This will easily enable Kits to reach its forecast 25% eyeglass share at some point in 2023 and most likely by Q2/23.
At that point, Cannacord was forecasting $162 million in shares which, again, given the substantial infusion of near 4 times more customers by the GreenShilds deal, should be easily reached.
So, Kits should achieve financial metrics forecast by Cannacord one year late.....ie in 2023.
Hence it's $17 target advanced to 2023 remains valid and very achievable target.
Canadian Equity Research
7 February 2021
KITS Eyecare Ltd.
Consumer Products
Initiation of Coverage
Rating Price Target
BUY C$17.00
KITS-TSX
Price
C$8.20
Market Data
52-Week Range (C$) : 7.55 - 10.20
Market Cap (C$M) : 254.2
Shares Out. (M) : 31.0
Dividend /Shr (C$) : 0.00
Dividend Yield (%) : 0.0
Implied Return to Target (%) : 107.3
Net Debt (Cash) (C$M) : (36.9)
Enterprise Value (C$M) : 217
FYE Dec 2019A 2020E 2021E 2022E
Revenue (C$M)
36.9 74.9 116.2 162.2
EBITDA (C$M) 3.6 6.1 6.1 16.9
EPS (C$) 0.02 (0.10) (0.07) 0.10
EV/Sales (x) 5.9 2.9 1.9 1.3
EV/EBITDA (x)
59.7 35.8 35.7 12.9
9.5
9
8.5
8
7.5
Source: FactSet
Priced intraday 5 February 2021
KITS is a rapidly growing digital eyecare platform founded in October 2018, operating as a platform of optical e-commerce websites including KITS.com, KITS.ca, OptiContacts.com and ContactsExpress.ca.
KITS
S&P/TSX Composite Index (rebased)
Feb-21
Derek Dley, CFA | Analyst | Canaccord Genuity Corp. (Canada) | ddley@cgf.com |
1.416.869.7270 Luke Hannan, CPA | Associate | Canaccord Genuity Corp. (Canada) | lhannan@cgf.com |
1.416.869.6618 Growth clearly in focus
Investment Recommendation
We are initiating coverage of KITS Eyecare Ltd. with a BUY rating and $17.00 target price. We believe KITS offers investors attractive exposure to the highly fragmented, high-margin eyecare market. The company’s unique, 100% online-only business model should allow KITS to exceed the average industry growth rate, as e-commerce eyecare penetration is set to accelerate, in our view. The company is run by a seasoned management team, which together owns ~74% of the shares outstanding and has demonstrated prior success in the online eyecare market. We believe the current valuation of 1.3x our 2022E revenue estimate, vs. peers which trade at 2.9x, represents an attractive entry point.
Investment highlights
• We believe KITS is well positioned on the precipice of what will be an acceleration
of the penetration of e-commerce within the retail eyecare market. KITS operates
a unique, 100% online-only business, selling both private label and well known third-party branded contact lenses and eyeglasses. While the eyecare market is highly fragmented, only 13% of eyewear sales in North America during 2020 were generated through online channels. This is well below other discretionary retail categories, which tend to have online penetration of 25-35%, a gap which we expect to close over the course of our forecast period.
• While growth in e-commerce penetration should help drive a larger TAM for KITS, we believe this will be further augmented by aging population demographics in the US and Canada. As consumers age, the need for vision correction increases, with over 75% of the population eventually needing some form of vision correction. Adding
to this secular tailwind is that many people are now spending more time in front of computer, phone, and TV screens, particularly given the new work-from-home trends, which has helped drive a greater need for vision correction products.
• We believe KITS in particular is set to achieve an inflection in revenue growth and margin expansion, as the company increases its exposure to higher-margin eyeglass revenue, which on average carries almost double the gross margin of contact lenses. Currently, eyeglasses represent only 2% of KITS revenue, but following an expansion of the company’s optical lab this year and next, we believe KITS eyeglass revenue will grow toward 25% of consolidated revenue, helping drive EBITDA margins
higher. With growth ready to accelerate, KITS is well capitalized to make incremental investments to improve brand awareness and add production capacity. We estimate the company will have a net cash position of $37 million at the end of Q1/21, leaving KITS well positioned to invest in organic growth opportunities.
• We expect revenue to grow to $116 million in 2021 (reflecting YoY growth of 55%) and $162 million in 2022 (YoY growth of 40%) as KITS ramps up production of eyeglass products. We also expect improving product mix as KITS increases its eyeglass product exposure. Coupled with a larger marketing budget and increased public company costs, we expect the company to generate $6 million of EBITDA in 2021 and $17 million in 2022.
Valuation
Our $17.00 target represents 3.0x our 2022E revenue estimate of $162 million and 29.1x our 2022E EBITDA estimate of $17 million. While there are no perfect public comparable companies to KITS, we believe the broader eyewear retail peer set is an appropriate barometer, with the group trading at an average of 2.9x 2022 sales. In our view, KITS should trade at a premium to these peers, given its earlier stage in the growth cycle, higher expected revenue growth, healthy balance sheet, and strong management team.
Canaccord Genuity is the global capital markets group of Canaccord Genuity Group Inc. (CF : TSX)
The recommendations and opinions expressed in this research report accurately reflect the research analyst's personal, independent and objective