Description

BALTIC CLASSIFIEDS GROUP

Baltic Classified Group (“BCG”) is the leading online classified group in the Baltics:

• BCG operates fourteen portals across three countries. On average, every citizen in the region visits a BCG portal 6x a month vs. 1x for the best-in-class European peer, Rightmove
• The company operates from a dominant market position that is unrivalled across European classifieds, with 10x the share of the no. 2 marketplace. The relative market share gap has increased in recent periods
• BCG has a top-tier, highly experienced management team and board of directors that are owner-operators who are executing a tried and tested strategy that should lead to continued improvement in monetisation
• Exposure to the high-growth Baltic markets, as well as substantial scope to increase take-rates, should drive high teens to low twenties per annum revenue growth to the end of this decade and beyond
• Given the large addressable market, scope for monetisation growth over time, dominant and improving market share, and leading customer proposition, we expect BCG to execute a proven strategy that should ultimately result in BCG’s value per share increasing 5 to 10 fold over the next decade
• The company is very under-covered by sell-side analysts, who underestimate both the magnitude and duration of growth. This should lead to continued positive upgrades to consensus estimates
• BCG offers the potential to compound earnings and fair value at mid-twenties for many years. If BCG was to trade more in line with peers - which is very plausible given BCG should deliver substantially higher growth rates, better margins and economics, and a more dominant/stable relative competitive position - then returns on the investment can be closer to 30% p.a. over the coming three to four years

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CEO Justinas Šimkus has been with the group for close to 20 years. He has guided the business under the ownership of Naspers and Apax Partners before bringing BCG to the public markets in 2021. The board of directors is also led by industry heavyweights. We know the chairman from his time as the CEO of UK used vehicle portal Autotrader. During his tenure, he led the 2015 IPO before overseeing a 150% appreciation in the equity by the time he stepped down at the start of 2020. Another director, Ed Williams, is the founder of UK property portal Rightmove in 2000; he presided over a fivefold increase in the share price before stepping down and assuming the chairman role at Autotrader and a directorship at the leading Spanish property portal, Idealista. BCG’s leadership team combine (i) multi-decade market and industry experience with (ii) a history of value creation in public markets; a combination that is more common in a €10bn+ classifieds business.

BCG’s level of market share dominance is unmatched across European classified businesses. At its core, BCG is a dominant two-sided marketplace. As the company notes, ‘The Group’s objective is to provide trusted marketplaces to connect listers and consumers across the Baltic region through “easy-to-use” and “feature-rich” portals that result in an efficient transaction experience for all parties.’ With a two-sided marketplace, it is the network that provides the majority of the value; to disrupt an established and well-regarded network requires the new entrant to convince both buyers and sellers to move simultaneously. Once a two-sided network has reached critical scale, the competitive risk reduces considerably, leaving the dominant portal positioned to extract monopolistic returns in a ‘winner takes most’ industry structure. BCG’s used vehicle portal - Autoplius - is 8x the scale of number two player, Autogidas. The company’s property portal - Aruodas - is 21x the scale of the number two, Domoplius. This level of dominance is unmatched across Europe.

Fig. 1: Summary financials

BCG generates the #1 margin in its entire global peer set. BCG offers one of the most compelling financial profiles of listed European companies. BCG has compounded sales at 20% over the last 5 years. The company’s operating profit margin is over 75% and expanding - higher than well-known, blue-chip names like Rightmove in the UK. Earnings have more than doubled since 2021 and BCG requires zero capital to grow - all FCF is returned via share buybacks and dividends. That means, with over 100% free cash flow conversion, the invested capital base has actually shrunk even as the business has grown materially.    

Our proprietary primary research checks have demonstrated the sustainability of BCG’s dominance. Evaldas Narbuntovičius ran Vertikali Medija for seven years, stepping down in 2023. Vertikali Medija owns both Autogidas and Domoplius, the number two portals for auto and real estate in Lithuania. Speaking about BCG Evaldas was unequivocal: “It’s impossible to compete.” The closest competitor in the industry is being run for cash on the basis “there is no way out from under BCG.” Indeed, since retiring, Evaldas has bought stock in BCG: "I used to be restricted but I will buy BCG’s stock now. It is so easy for them to make more money. I don’t know anything that can change this position.” Sven Nutmann, former board member, stated that even if BCG did nothing for five years nothing would really change: “Honestly, they’re so strong. Even if they did nothing for five years nothing would change [competitively]… I think it’s more or less impossible to compete with them.”

Regulatory risks are plausible conceptually but look de minimis in practice. Meetings with staff from the Lithuanian Competition Commission (“LCC”) indicate that the LCC believe fundamentally that markets self-regulate and that the LCC’s role is to protect consumers from illegal behaviour. Given neither dominance or charging more is illegal, BCG ‘just need to keep doing internal work and making sure they can evidence the price rise was alongside a change in value add if the council asks,’ according to Simona Liuimiene, who worked with the LCC for 6 years.

In contrast to some of the better-known European portal companies like Schibsted, Autotrader, and Rightmove, BCG is at the start of its monetisation journey. The price of a BCG listing both in absolute and relative terms is well below other European countries, indicating a long runway for price led growth. On an absolute basis BCG offers sellers compelling value. In Lithuania a dealer typically captures around 10% commission on a given vehicle sale. The average used vehicle price is around €9k implying a gross profit per sale of €900. The cost to list on BCG per month is €270. For consumers an advert is €20, 0.2% of the expected sale cost. Switching to real estate, a monthly subscription cost of €180 compares to the dealer commission of 3%, or around €4000 per home. On the consumer side the advert is €24 per month. The absolute levels of revenue per transaction are very low for a portal that executes over 90% of the transactions in the region, indicating significant surplus customer utility being offered.

On a relative-to-peer basis, BCG’s take rates have significant room for expansion. The take rates on BCG’s auto, property and job portals are 1-3% for business users. Contrast this to other ‘mature’ portal take rates of 5-6% in auto, 5-9% in real estate, 8%+ in jobs. This gives an indication of the scope for BCG to improve the monetisation of its customer base as it rolls out new products and price packages. BCG could double its prices and it would still be monetising at the low end of peers.

What makes BCG particularly compelling as an investment case is that the value of the goods transacted on its platforms is growing 8-10% per annum, versus ‘mature’ markets growing at low-single-digits. This is a function of higher growth in disposable incomes across the Baltic states relative to Western Europe. In practice what that means is that with the aforementioned ‘mature’ portals targeting 10% plus growth per annum, BCG can compound sales at 20% without closing the gap in the take-rate. A high growth commission pool extends the duration of growth available to the group. We believe we are prudent by assuming BCG can compound sales at 15% p.a. through the end of the decade: in that scenario, take-rates would roughly double but the gap to ‘mature’ platforms would actually widen. BCG has the clear means motive and opportunity to compound at highly attractive rates well beyond the end of the decade.

We believe BCG is an example of a very high quality mid-sized European company not being perceived as such by the market, which is a pattern we look to capitalise on. BCG remains a relative newcomer to public markets. It is only covered by five sell-side analysts versus peers with seventeen or more. Yet it has industry leading customer engagement, unparalleled relative scale, very low take-rates, industry leading margins, and a highly experienced management and leadership team that are owner-operators. All of this for a multiple that is 30% below the peer group average and roughly half the level of companies generating a similar level of growth.

The most plausible risks are share price volatility, aggression by Russia towards Europe and competitor activitiy. As with all mid-cap stocks, limited trading liquidity can result in elevated share price volatility. BCG is still partly owned by Apax, which creates an ‘overhang’ on the listed stock as many market participants expect Apax to continually place stock. We find this pattern tends to be a fruitful, non-fundamental opportunity for mid-sized, ex-private equity owned businesses to be temporarily mispriced. The proximity of the Baltics to Russia may also result in gyrations in the share price in response to perceived aggression by Russia towards Europe, yet BCG is a UK listed company and the Baltics are a NATO member with American and other NATO armed forces stationed there. We plan to take advantage of any transitory share price dislocations to add to the position. The highest magnitude fundamental risk we monitor is the risk of disruption; currently, we assess the probability of this risk occurring to be very low. We consistently assess competitive threats to online classified businesses across the globe via a range of primary checks. Given the dearth of evidence that suggests disruption is probable, BCG is positioned to continue compounding at >20%, doubling the equity value every 3-4 years.

BCG’s investment case has a high probability of inflecting positively in the next 12 to 18 months. Since listing, BCG has a consistent record of beating sell-side estimates and driving low-single-digit percentage positive revisions. The estimate trajectory is consistent with a typical ‘beat-the-fade’ investment case. Sell-side analysts are reticent to extrapolate both the magnitude and duration of growth. Yet, with its industry position effectively enshrined by the strength of its network, and no competitive or regulatory threat, BCG has all the pre-requisites required to compound growth at high-teen rates through the end of the decade. This will result in a positive inflection in the quantum of positive estimate revisions.

We believe both (i) the rate and (ii) the sustainability of BCG’s growth should lead to revenue in the mid- to long-term materially above that expected by the sell-side. Furthermore, with industry leading operating margins, analysts are reticent to model any margin expansion off the existing level. Having been through the cost base in detail with management, we believe that the sell-side modelling is probably incorrect. It seems more probable that management will return the business to the 80% plus operating profit margin it generated pre-IPO. The result of our above market sales forecasts compounding on a higher operating profit margin is an adj. operating profit of €81m in FY 2026, 80% higher than FY 2023, a compound growth rate of over 20%. This translates into double digit upgrades versus sell-side earnings forecasts.

We believe our financial forecasts are set conservatively. In general, we aim to tilt prudently when building financial forecasts. As such, we model a slight slow-down in the growth rates to 16% versus the 21% average rate since 2019. Yet, with recent results indicating no evidence of that manifesting, our estimates are likely to be positively revised upwards over time. As BCG demonstrates stable, high growth and consistent operational and strategic execution, the trading multiple is likely to steadily grind higher toward the peer group average. Peers trade on average on 30x forward earnings for much less EPS growth than the 20% BCG can plausibly deliver. If the multiple re-rated to that level over the next 18 months, BCG would generate a 60% return.

We believe a 20 to 25% annualised return for many years is a prudent base case. This is based on the prudent assumption that the trading multiple does not re-rate towards peer levels and is supported by DCF and multiples-based valuation approaches. We believe this assumption is very conservative given BCG’s dominant competitive position, sizeable surplus customer utility offered, and strong track record of execution. This base case does not capture the potential positive optionality from the potential deployment of free cash flow into acquisitions, which have been material sources of value creation in the past.

Catalyst

Apax continuing to sell down shares + increase liquidity (currently 1-2m ADV USD) is probable in 2024. 

M&A - Purchase of leading platforms in adjacent markets plausible in 2024.