Description

Auction Technology Group  (ATG.LN) is a leading online platform for auctions across Europe and the US. ATG was one of the first movers in the online auction industry and owns and operates eight leading online auction marketplaces enabling auctioneers in two different verticals - Arts & Antiques (A&A) and Industrial & Commercial (I&C) - to connect with bidders from over 160 countries. The company IPOed on the LSE in Feb 2021, and the company has a convincing playbook to continue to grow organically and inorganically to be a winner in a secularly growing secondary goods market across different verticals and geographies. 

It is important to note that ATG itself is not an auctioneer itself, but they are a classifieds business that connects auction houses with bidders by giving auctioneers the necessary technology to run auctions online. This explains why their total take rate of ~4% is much lower than most peers who are auctioneers themselves (Ritchie Bro’s take rate is ~15%, and 1dibs is ~20%). Though ATG’s total take rate will thus be structurally lower, there is still plenty of upside as the company rolls out value-added services, closing the gap vs more-established peers. 

ATG connects roughly 3800 auctioneers from around the world to bidders from around the world, and ATG provides auctioneers the technology and infrastructure that most can’t invest in themselves.  ATG has several opportunities to improve outcomes for auctioneer clients, such as raising Total Hammer Value (THV) through mechanisms like timed auctions, payments, and other services that improve the buyer experience.  

Most of ATG’s revenues come via a take-rate/commision on GMV (which is itself converted from THV or Total Hammer Value) that is sold through its own websites. Take rates vary by platform, but it comes out to 1-3% of the purchase price for the I&C segment and 4-5% of the purchase price for the A&A segment.

They are the leader in the US I&C market and the UK A&A market, and where they are not #1, they are a meaningful player in most markets they are present in. It’s not to say that competition is not a concern, as the A&A markets in both the UK and US have competitive threats that should be worth keeping an eye on. But the existing scale and the switching costs associated with ATG’s integrated back-end software - supported by consistently solid auctioneer retention rates -   makes it that much harder for them to be displaced. Barriers to entry are not too high, but barriers to scale should be meaningful.

The A&A  inventory includes a large variety of secondary items including things like Watches, jewelry ,furniture, fine arts and collectables. The average lot size for the segment is ~250 GBP. 

The I&C segment deals with larger equipment meant for businesses. Inventory is usually sourced from businesses selling old equipment, bankruptcies, or rental companies selling used equipment. Inventory can be categorized into three buckets - Grey Iron (Manufacturing equipment), Yellow Iron (construction equipment), and Green iron (ag equipment). The average lot size for the segment is ~600 GBP. The two segments have different market dynamics and economic sensitivities, but so far the company has grown to be a major player in both verticals, and are either #1 or near that in most of its exposed markets.

Take-rate upside is one of the key legs for the bull thesis, as ATG should have plenty of upside as they continue to improve their value proposition and ancillary services. Take-rates across internet marketplaces vary a lot due to several structural factors and the kinds of value added services that are provided. Payments is usually one of the first services marketplaces add, and it is no exception to ATG, providing an integrated payment solution for business that requires online transaction is a simple but effective way to increase value proposition for both bidders and auctioneers. Ebay’s payment take-rate alone was ~3% recently, which we think is an aspiration yet possible goal for ATG. CEO John Paul-Savant even spent 10 years at Ebay and Paypal. 

The payments roll-out is ongoing. LiveAuctioneeer’s payment adoption rate has gone from 0% ending in 2022 to 83% this year, and Proxbid’s payment rollout is also hitting 21% in its first 3 months of roll-out. Besides payments, marketing, shipping, insurance, art restoration, and storage could also help push take rate higher, and as the company communicated, the playbook they’re trying to play is not about reinventing the wheel but executing a well understood playbook done by many others. The upselling potential is promising as they try to become a one-stop shop that offers a variety of services that would make the auctioneers and bidders’ lives easier. Once you break down the components of take rate and the upside potential, we think the upside here is material without having to make any aggressive assumptions.

• “adding payments, adding shipping, improving the image quality, improving the cookie trail that bidders follow the registration experience, the way that they can use their identity. So many different things that we can do there. And 90% of it having been done by other companies before. So we're not asking you to believe that we're doing something like reinventing the wheel. It's simply getting out there and doing that well-trodden path of experience development that drives increased conversion” - q4 call

Online migration of the auction industry has been the key trend for the ATG, as more live auctions are moving online. For Auctioneers, the incentive to move online is clear: unmatched access to bidders from around the world, cost savings due to less setup and costs associated with running a live event, and data analytics insight potential that was not available before in a live only auction. Bidders prefer online due to convenience, access to much larger selection of items, and better price transparency. 

The A&A vertical has been slower to move online compared to the I&C industry, with Bidspotter (ATG’s largest I&C platform) reporting >90% online share compared to the ~31% in 2017. A&A auctioneers historically have preferred the live format as it meant less price transparency, and the unique inventory of A&A vs I&C (every antique is different and requires a more in-person assessment but a used tractor can be summarized easily through pictures and a brief description). Covid was a boost and there certainty was demand full forward, as we saw headwinds starting in 2021 as live auctions came back on. Still, there should be more room to increase online penetration for both verticals. An UBS art market report from 2022 showed that 84% of art dealers were expecting the increased online sales driven by the pandemic to be permanent, and the pandemic likely fast forwarded the online transition. This should support GMV growth above MSD through the cycle. 

The I&C business is relatively macro resistant, as price and volume work as counter balances during good and bad times. Higher prices compensate for lower volumes and vice versa; recessions lead to higher volumes as inventory is increased from the influx of bankruptcies and more demand for cheaper used equipment. A few good reference points we could find were Proxbid’s Total Hammer Value being up during the GFC thanks to a strong volume bump that was able to more than compensate for the price headwind, and Ritchie Bro’s GTV down 3% in 2009 and 6% in 2010 which fared well considering its industrial exposure. 

The A&A vertical is a bit more cyclical, as demand for antiques naturally should be more economically sensitive and discretionary, though it likely does have a supply boost during a recession (more need to sell due to debt burdens and downsizing). However, the low end part of the market that ATG focuses on (average lot size of ~250 gbp) should be much less sensitive than high-end markets. Data by Art Economics in 2022 showed that sales value in the lower to mid market (sub $50k, so ATG is in the very low end here) only declined 8% in 2009, while the high-end market declined over 50% during that same time. Cyclicality has been one of the key debates for the stock in the last year, and the strong results from both I&C and A&A segments (the volume-price dynamic previously mentioned) largely has validated the resiliency of the business. Of course a more severe economic downturn will be a greater headwind to the business, but so far, management is guiding to accelerate growth for the rest of the year and the business continues to chug along.

ATG has been and intends to keep consolidating its industry.  We think the deals so far have made sense and have been executed  and integrated well. There seems to be fragmentation in certain pockets of markets they compete in and as a leader with a competent M&A team in our opinion, a roll-up strategy could fast track their growth and strengthen their scale driven network effects. As we’ve seen in other market place and classifieds verticals, scale is the name of the game and the industry will likely consolidate to a few large players. Not all deals have been to add scale alone. Their acquisition of Live Auctioneers in 2021 helped ATG to roll-out LiveAuctioneers payment solutions to the rest of ATG’s platforms along with other technology related know-hows. As they focus on increasing other services to increase take-rate, it’s possible they buy for the purpose of adding/improving more features. 

Starting with underlying GMV growth of 5-7% through cycle, between online share gain (1%-3%), ATG’s share gain (1-3%) , take rate expansion from payments and marketing (5-10%), there are multiple shots at goal to get to 15-20% growth before accounting for any M&A. Their willingness to leverage this growth with 2-plus turns of debt (for M&A or buybacks) is also helpful for long-term returns.  The proven operating leverage of the business also means the bottomline can grow faster as well. 

And for a high quality scaled classifieds business with high incremental margins growing at ~15%+, the ~5% FCF yield and low teens EBITDA multiple the stock is trading at does not seem too demanding to underwrite an IRR that starts with a 2 handle. Classifieds and marketplaces with this level of predictability & growth often trade closer to 10x rev and 2-4% FCF yields, vs ATG’s 6x revs today.  

We think CEO John-Paul Savant is the right person to execute their playbook given his highly relevant skill sets he brings from ebay and paypal, and we view the presence of TA associates as the largest shareholder (~17% shares outstanding) and board representation as plus as minority shareholders.

Catalyst

If all goes to plan, the stock can re-rate as organic revenue growth accelerates north of 15%.  perhaps to 20%.