Description

There are well over 100 online classified (OC) websites around the world, some of them dating back as far as the mid-1990s.  It’s typically a winner-take-all industry, where the victors enjoy EBITDA margins of 40-60% and lots of secular growth.  I’ve tried and failed to find an example where a website with a clear lead (say, 2-3x the size of the #2 player) subsequently lost the top spot.  On the other hand, I’ve found plenty of David-beats-Goliath stories, where a big company like Google, eBay or even this one – Schibsted – tried and failed to knock some much smaller company out of the top spot.  In fact, Schibsted today won’t even bother to enter a market where someone else has clearly taken the lead – regardless of who they are.

(Notes: share price in NOK.  All other amounts in € millions unless indicated.  Net debt (above) includes pension liability and minority interest)

Schibsted was founded in Oslo, Norway in 1839.  While their roots are in the newspaper business, management realized back in the mid-90s that the future of classified advertising is on the web, and they’ve since become one of the world’s leading OC operators.  Their typical marketplace is like a profit-maximizing version of Craigslist.  In other words, local buyers and sellers meet up to finish the transaction.  Unlike eBay, they don't typically take a cut of each transaction, but rather charge (in some cases) a small fee to list, as well as for premium listings and for advertising.  Within OC there are four main verticals (or “categories”, if you’re old and grumpy like me) – generalist (aka C2C), cars, jobs, and real estate.

So here’s the punchline:  Schibsted is a very high-quality growth stock that screens expensive but really isn’t.  The forward EBITDA multiple is north of 25x, but that’s deceiving for two reasons.  First, they’re incurring losses to win the top spot in certain countries/verticals where there isn’t yet a clear leader, and that’s offsetting earnings from countries where they’ve already won.  I exclude these losses in my valuation for good reasons:

• Their investments in new markets (via opex losses and capex for acquisitions) appear to be paying off handsomely -- cumulative investment of about €2.8B versus 2017E EBITDA of more than 600M.  Even if you use the LTM results (~250M) you still get to a multiple at the low end of where M&A gets done in this sector.  Capex averages less than 3% of revenue and the blended tax rate is 29-30%, so FCF conversion is high.

• Management has been disciplined in getting out of countries when their odds of winning turned for the worse.  (e.g. exited Greece and Australia, did a JV with main competitor in Brazil, etc.).

• They can stop spending in one country without affecting websites in another (no site caters to more than one country).

Second, recent developments in countries like France, Spain, and Brazil will likely accelerate growth over the next few years or more.  Based solely on those countries and verticals in which they already have a clear lead, I estimate these shares are trading just over 13x EV/NOPAT, which I think is pretty darn reasonable for a business with a solid moat and a huge runway for growth.

So, yes, they’re still in the newspaper business, mainly in Sweden and Norway.  Media Houses (their term for the legacy newspaper business) are obviously not the sexy part of this story.  EBITDA is declining moderately but growth in online earnings (from online subscriptions etc.) should stabilize these earnings within a few years.  Management has been quick to make the tough decisions needed to keep costs in-line with revenues (i.e. layoffs, closing printing plants, etc.).  No one is clinging to the past here.  There’s even a chance earnings here could eventually start to grow again.  They’ve launched a bunch of personal finance and other websites in Sweden and Norway (included in Media Houses) that are showing good results so far. In any event, Media Houses account for only ~95m of my 658m 2017E EBITDA and a smaller proportion of net income, as printing plants obviously need more capex than do websites.

So let’s get to the OC business, starting with a brief history:

Their first classified website was Finn.no, launched in 1999.  Finn means “to seek and to find” in Norwegian.  They subsequently tried to enter Sweden but could not displace Blocket.se – a rather simple website launched by just one person in the mid-90s (similar to Craigslist).  So in 2003 they gave up and acquired it.  Since then they’ve cloned the Blocket site in dozens of countries around the world.

A few years ago, pundits were predicting that eBay was going to clobber Schibsted in Continental Europe.  But the doubters turned out to be wrong.  EBay de-prioritized the Europe during the financial crisis, and this is perhaps what allowed Schibsted to win France, where eBay declared defeat in March of 2013.  With the help of some acquisitions they now dominate pretty much every vertical in Spain.  And as I will discuss, they now appear to be pulling ahead of eBay in Italy.  (By the way, management has stayed away from Europe’s two largest markets - the UK & Germany - saying they would be too costly to enter.)

In emerging markets, Schibsted’s chief nemesis has been Naspers, particularly in Brazil, where they’ve been running neck-and-neck in terms of website traffic.  Brazil has been the lion’s share of EBITDA losses on New Ventures (their term for not-yet-profitable markets).

Total EBITDA fom New Ventures

I think this trend had some investors quite concerned.  Although Brazil is a big prize, Naspers has far more free cash flow available to win this fight, and a careful read of their disclosures revealed that they were spending roughly twice what Schibsted was spending on emerging markets last year.  Hence we saw a big sigh of relief last November when they announced a big JV with Naspers that covered basically all the major countries in which they’d been fighting each other.  Notably, their sites in Brazil will be merged and ownership split 50/50 (which leaves Schibsted with an effective 25% stake as they had an existing 50/50 JV in that country).  Since then, Schibsted has decided to cut new venture spending in half for 2015.

While I find it somewhat painful to look at the 5-year stock chart, I’m take some comfort in knowing the story has been significantly de-risked over that time (by taking France, Spain, and the JV with Naspers).  Further, US-based investors should keep in mind that Norwegian Kroner has been crushed in the past year.  The price in USD has risen less than 8% in that time.

Major markets, in descending order of maturity (i.e. monetization):

Norway

Finn.no benefitted early on from cross promotion via Schibsted’s leading newspapers.   Today they dominate all verticals.  It’s their most mature site, with a remarkable €37+ RPIC (revenue per Internet consumer  =  revenue / (population * % online)).   Despite already having the highest RPIC of any site in the world, Finn has still managed to grow revenues at a mid-teens pace in recent years.  Now, however, the plunging oil price has slowed things a bit.  Further, management switched the site to a freemium pricing model last year (i.e. basic listings are free but additional services cost money) and this will slow the growth even more, at least for the time being.   I’m expecting mid-single digits growth through 2017 (i.e. no credit for any boost from the freemium switch, to be conservative).  They own 90% of Finn.no.

Sweden  

As with Finn, Blocket.se got an early boost from cross promotion from Schibsted’s dominant newspapers.  Together with car site Bytbil.se, they do a healthy €12+ RPIC in Sweden, despite leading in only two verticals – generalist and cars.  In management’s view there are no dominant leaders within jobs or real estate and both verticals are currently poorly monetized.  (In my experience, most Swede’s seem to think Hemnet.se is the clear leader in real estate, but I’ve heard no objection to the view that the jobs vertical is up for grabs.)  In any case, management is now focused on winning both verticals.  I’m modeling hsd growth (i.e. no credit for success in jobs or real estate).

France  

Leboncoin.fr (French for “the right spot”) is Schibsted’s biggest market today and will likely remain so for some time.  It’s extremely popular and owns all verticals except real estate (and they just might win that one too).  Until the end of 2014, Leboncoin was locked into a JV for real estate which gave them only a ~20% cut of revenues and prohibited them from working directly with real estate agents.  With this JV out of the way we should see a significant bump in sales this year.  It’ll take some time to sign-up agents, but eventually I don’t see why they couldn’t have 40% of the online real estate market, which was about €250M in size in 2014.  Together with just 15% annual growth in the other verticals, I get to €333M revenue in 2017.

With an RPIC of €2.60 last year, management is clearly not as far along in monetizing France as they are in Norway and Sweden.  The CFO has repeatedly said that he sees no reason why France couldn’t eventually match Sweden on this metric.  While GDP/capital in Sweden is ~37% higher than France, Leboncoin dominates more verticals, so I guess it could happen.  My 2017 estimate has them at under €6 in RPIC – still less than half of where Blocket was in 2014.

Note that I’m not expecting the current #1 in real estate – SeLoger.com - to go away.  The UK experience - where Rightmove and Zoopla have a lucrative duopoly - seems to demonstrate that the real estate vertical might be an exception to the winner-take-all dynamic in online classifieds.  My estimated 40% share in 2017 would have them still trailing SeLoger, which has a 50% share today.

Spain    

Schibsted entered Spain by purchasing a JV stake in some sites that their partner had already launched.  It didn’t have operational control before buying out the partner in mid-2013, and the assets had been managed with an emphasis on short term earnings rather than long-run success.   As a result, its competitor in the generalist category - Milanuncios.com  - pulled ahead of Schibsted’s Segundamano.es.  After a fierce battle, they finally acquired the competition in 4Q14 last year and for the first time there is a clear leader in that vertical.  In addition, they dominate the cars vertical with Coaches.net, the jobs vertical with Infojobs.net, and are currently tied for the top spot in real estate with their Fotocasa.es (vs Idealista.com).   

This brief history explains why I think their historic results in Spain should have little bearing on the future.  With the exception of Infojobs, they’re doing a complete product makeover.   Beginning last fall, they dialed-back monetization to boost traffic.  As a result, 4Q14 revenues grew yoy for the first time in three years, but margins slumped to 6%.  I expect 2015 to be an “investment year” as far as margins go.

Recent events in Russia might offer some clues as to how this will work out.  Generalist sites Avito.ru and Slando.ru were battling it out until they agreed to a merger in March 2013, with the remaining site keeping the Avito name.   Avito’s revenues went from USD 30M in 2012 to 75M in 2013. For 2014, Avito said it expects revenues to double to around USD  150M and margins to exceed 50% (whereas pre-merger Avito operated at a loss).

I’m not counting on this sort of hyper-growth for Spain, but I do think that revenues  - which have been stuck below €100M for years  - could exceed €250M by 2017.   Spain is still in the early days of monetization (RPIC = €2.35 in 2014), so with a clear lead they should soon have ample room to raise prices.  Also note that Internet penetration in Spain is somewhat lagging (72% vs ~90% for Norway, Sweden and France), so there’s room for growth there as well.

Italy   

(Please note that management includes Italy in their "International segment" whereas I break it out. You can get them via public filings in Italy. Some of these numbers are estimates.) Subito.it is the leader in the generalist and cars verticals, and #3 in real estate.  We can observe from traffic numbers and changes in listing prices that Subito is indeed increasing the distance to its main competitor eBay in the Italian market.  For example, the generalist site has ~5.5x as many monthly page views as eBay, and 7x more mobile app downloads.   

In October of last year management said, “We have been rather modest in some of the marketing in Italy ... we think it's right to also do some more investment actually to really speed up the progress in Italy.”  And they’re doing it - revenues jumped 49% yoy in 4Q14.  The top line is still relatively small (2015E €30M) but growing quickly.

There’s a lot of room for growth here.  At €0.51 RPIC in 2014, Schibsted is just starting to step on the monetization gas pedal.  And Italy itself is just starting to get comfortable with shopping online.  Despite its roughly similar size and wealth, a much larger portion of France is online (88% vs 58%), and French ecommerce sales are 4.5x larger.  At their investor day in Oct. 2013, management said that Italy “is actually the site we hope will become the next Leboncoin. ... Subito is growing faster than Leboncoin and will be the second largest site in Schibsted Classified Media very soon.  So it's a large site and growing faster and faster every year.”  I’m guessing that the 4Q14 trend continues (i.e. ~50% revenue CAGR), resulting in €68M of 2017 revenue.

International – includes smaller markets in which Schibsted has the lead in (at least) the generalist vertical  and is roughly breaking even or better.  In descending order of potential profit, this includes Brazil, Austria, Finland, and Ireland.  It also includes a few countries that don’t do much revenue today but have lots of potential in the long-run:  Malaysia, Thailand, and Indonesia (which together have a population in excess of 350M.  Schibsted has effective ownership ranging from 12-33%).

International includes:

Brazil (included in “International” from 2015+)  While Schibsted now has only a 25% slice, it’s going to be a big pie.  The population is over 200M people, just over half of whom are online.  Like Spain, this is another market that could echo the Avito.ru story in 2015.  I think Schibsted might get something like €17M EBITDA from Brazil in 2017, which will still be the early-innings of growth.  FYI, the merged site will keep the Naspers name (olx.com.br).

Finland - Tori.fi has more than double the traffic of competitor Huuto.fi, and is in the early phase of monetization.  This is a relatively wealthy country with roughly as many people as Norway, and over 90% of the population is online.

Austria   Willhaben.at is market leader within most verticals and has outgrown eBay markedly.  As of January 2014, Willhaben had over 2M listings (up 40% yoy) and over ten times as much as Bazar.at (the #2 generalist site).   Demographics would seem to indicate that the Austria market could be maybe 3/4 the size of Sweden in the long-run (but Schibsted has only a 50% stake).  Interestingly, it’s the only clone of the Finn.no website.

Ireland   Donedeal.ie is #1 by far in the generalist vertical and roughly tied for the top spot in cars.  Growing 30-40% a year with margins north of 45%, Ireland could eventually be 1/3 the size of Schibsted’s OC business in Sweden.

New Ventures (startup-phase markets not included in 2017E EBITDA)

The main country to watch in this group is probably Mexico (population of 120M, 45% online).  The Naspers JV basically ceded Mexico to Schibsted, who is now the clear leader.  Hungary and Chile could be interesting as well.

Catalyst

In the words of the most bearish sellside analyst I can find (Barclays), “we see few positive catalysts in the story in the next few months.  That said we do see long-term value in the shares.” [2/16/15]

If you need a quick pop, stay away.  But if I’m roughly right about the EBITDA growth this should work out nicely over the next few years.