Description

Hemnet (HEM SS)

Thesis

Hemnet is the #1 Real Estate Marketplace in Sweden.

In order to sell your home, you have to list it on Hemnet.

If you want to buy a home, all the inventory is on Hemnet.

Hemnet is a former co-operative created by real estate agencies, and only started monetizing in 2013.  Their monetization rates remain well below their global peers.  e.g. REA monetizes at 6x the rate as Hemnet. G24 at 3x, and Rightmove at 2x.  REA is Hemnet’s closest peer, because they both charge the home seller, not the real estate agent, for listing the property.  This means the listing fee comes out of the full sale proceeds, as opposed to the much smaller agent commission.

We believe, and management tells us, that Hemnet will close the monetization gap.  We think they will do this gradually over time, rather than all-at-once.  Management understands the game and knows the market puts a big multiple on visibility to many years of excess growth. 

We see the potential for a long runway of 20+% revenue growth. This will also be significantly accretive to margins, which are in the mid-40s today vs. peers in the 60s to 70s.

Hemnet trades at 55x headline 2022 EPS, and therein lies the opportunity.

That EPS reflects an under-monetized asset at a depressed margin.

Using REA’s monetization rate (33bps of avg sale value) and margin (~60%), Hement is trading under 10x normalized earnings.  Which compares to mature peers Rightmove and REA each at 30x.

Full Thesis

History

• 1998: Formed as a co-op of RE agents, 5 separate organizations.

• 2013: Launch rev model where home seller pay to list their property. They charge SEK 600 per listing and 50% admin fee to the RE agents.

• 2017: 2 PE funds (General Atlantic and Sprints Capital) as well as Care of Hemnet (new entity of RE agents to invest in Hemnet) take majority ownership.

Traffic

• Hemnet has 10x the visits as the #2 Booli and #3 Boneo. Blocket is the Schibsted owned generalist website. They tried to get into RE listings in 2015, and failed.

• 10x the #2 is a stronger traffic lead than we see elsewhere.  E.g. the traffic winners in the AUS, UK and Germany each have 2-2.5x the visits as the #2.

• In short, Hemnet is the dominant winner of eyeballs in the Swedish resi real estate market.

Traffic mix

• 80% of traffic is direct, i.e., they don’t rely on Google. They have the 5th strongest media brand in Sweden behind SPOT, NFLX, GOOG and Youtube (per YouGov).

Revenue Mix

• 60% of revenue is from home sellers for listing fees.

• 15% of rev is from Agents for analytics and tools.

• 15% is from developers

• 10% is display ads.

Listing Fees (60% of rev)

• Rev model = fee per listing

o   In Sweden, the listing fee is paid by the home seller, not the agent. This gives the marketplace more pricing power because the home seller sees the value they get from the marketplace as the entire house purchase.

o   In contrast, in UK and Germany, the marketplace monetizes by charging agents an annual subscription fee. For the agents, the subscription is a marketing cost against revenue that is the commission, not the entire property sale. So they are more price sensitive. The reason markets develop like this is just a quirk of history.

o   AUS similarly has a seller-pays model, and as a consequence listing fees are much higher there, than in UK/Germany.

• Listing Monetization

o   Hemnet’s share of the pie they capture in the RE transaction is below global comps. This is because they were a co-op and only started charging in 2013. The best way to normalize monetization, I think, is to look at the fee as a % of the property value. On that metric, Sweden in 6bps vs. RMV/L at 12bps, G24/G at 15bps and REA/A at 33bps. REA/A is the best comp because they have the same revenue model where the costs can be passed through to the seller.

• Other detail

o   In Australia, the home seller gets a bill from the agent, and in that bill is a fee from REA.

o   In Sweden, the home sellers logs into a self-serve portal on HEM/ and choose the package they want. The portal shows the consumer the way the listing looks under different options. I think that means they own the customer more and are potentially even better than REA.

o   This year, they made pricing changes that incentivized agents to push upsells.

o   Now they adjust the listing price based on the property value and the location. Longer-term they want to segment pricing for each customer and each property. For example, adjusted pricing based on seasonality, time of payment or other more nuanced measures.

Agents Products (15% of revenue)

• In addition to the core listing product, Hemnet offers tools to RE agents like the global comps. Examples of tools are valuation products, scheduling viewing, helping them find sellers, helping them brand their agency and manage the sales process. They see long runway to layer on new services for agents as they are still earlier than global comps. They monetize primarily through subscriptions but also offer variable products as well.

Display ads (10% of revenue)

• It adds a little clutter to the page, for example, I see a furniture ad on top of a potential listing. Other marketplaces do this.

Adjacencies

• Hemnet has a long list of adjacencies to go after, such as:

o   Home sellers: tools to find RE agents

o   Developers: new sales

o   Banks: mortgage

o   Rentals

o   Holiday homes (i.e. ABNB)

o   Commercial Markets (tenants for office and retail space).

RE Cycle

• Swedish RE market has been relatively resilient vs. European peers. # of txns fell 11% in 2008. Number of txn’s were flat from 20010 to 2012 and have been slowly growing since 2013. Prices have been growing 4%/yr from 2015-2020.

Financials

• Revenue: Grew revenue +19% in 2019 and +22% in 2020. They target +15-20% over the medium term, which is mostly coming from rev per listing increases where we see lots of visibility.

• Margin: The EBIT margins are mid-40% next year, which was their target at IPO. We think this target is sandbagged, vs Rightmove in the mid-70s and REA in the 60s

• BS: 1x net leverage.

Valuation

• P/E on current earnings

o   55x headline 2022 EPS.

o   <10x normalized EPS, which sets monetization to REA levels (33bps of txn value) and margins to 60% (in-line with REA).

o   Largest peers REA and Rightmove each trade at ~30x 2022 EPS.

• Size triangulation

o   Hemnet is a USD$2bn EV vs REA at USD$15bn.  REA’s EV is 7.5x larger despite AUS having just 2.5x the GDP of Sweden.

Disclaimer:

This presentation is intended for informational purposes only and you, the reader, should not make any financial, investment, or trading decisions based upon the author's commentary. Although the information set forth above has been obtained or derived from sources believed to be reliable, the author does not make any representation or warranty, express or implied, as to the information's accuracy or completeness, nor does the author recommend that the above information serve as the basis of any investment decision. Before investing in a security, readers should carefully consider their financial positions and risk tolerances to determine if such a stock selection is appropriate. At any time, the author of this report may trade in or out of any securities that are mentioned in the report as long or short positions in his own personal portfolio or in client portfolios that he manages without disclosing this information.

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Catalyst

Convergence of monetization levels towards mature peers.