Description

Scout24 is a dominant online real-estate classifieds company based in Germany. It operates a marketplace ImmobilienScout (IS24) that connects sellers (professionals including landlords, homebuilders, residential/commercial RE agents, and private sellers, including regular homeowners) with home buyers and renters. Of an estimated total 30k real estate agents in Germany, Scout24 has 21k real estate agents as paying customers on its platform, with membership subscription ARPU €873 for FY22. Agents in Germany form a highly fragmented market, with only a few large nationwide players. While professional sales have been the larger portion of the Scout24 model, private sales grew at 29%y/y in FY22 to reach 27% of group revenue. (Please read the disclaimer and risks sections towards the end of this post as you conduct your own due diligence.)

Why is the business interesting?

1)      Scout24’s business model has evolved over the years with a focus shifting from monetizing mere listings to monetizing several parts of the real estate transaction. Auto classifieds segment AutoScout24 was sold in 2020, rendering Scout24 a pure-play real estate classifieds portal. Alongside subscription revenues (professional and private), Scout24 introduced new products (seller leads and mortgage leads) and made relevant acquisitions, including: (i) ImmoverKauf24 for free home valuations, free broker suggestions, and other services, and (ii) Vermietet.de for rental property management. The addressable market of commissions, as illustrated in this slide from Capital Markets Day 2021, is €11B

Source: Scout24 Capital Markets Day 2021

To begin with, as a pure-play classifieds business Scout24 has the advantages of being asset-light, with a high-margin core business that has healthy cash flows. The revised business model makes Scout24 relatively more resilient in downturns. The TenantPlus product with 320K subs (as of FY22) is focused on rental management for landlords and forms a natural hedge when home purchases are on a decline and rental markets are heating up.

 2)      Scout24 has a strong brand reputation as the dominant German property portal. Flat buyers in Germany would typically first check on Scout24 when they start thinking about purchasing real estate. So it makes sense for sellers to list on Scout24. Further, unlike in the US, German real estate transactions typically have only one agent, whose commission, after recent laws, is now split evenly between the buyer and the seller. (Previously it was fully paid by the buyer.) Now that sellers also have to pay half of the commission, a trusted brand is all the more important.

In a fragmented agent market, with a long tail of not very tech-savvy real estate agents, Scout24 is a necessary marketing spend that helps agents win mandates from landlords. Scout24’s listings are estimated to be larger than that of closest peers. Unlike the US, Germany has no official MLS. Building on a first mover advantage and decades-long strong brand reputation, the marketplace grows from a natural virtuous cycle: as a platform at scale with high engagement, the more sellers add their listings to the platform, the better the product selection and variety gets. This drives traffic to the platform and more buyers eventually drive incremental buy/rent transactions. As the platform monetizes more of the transactions, profitability increases and that fuels further investment for growth.

 3)      While Scout24 subscription comes at a premium, it seems justified and still offers a great ROI for agents. The scale advantage and a richer product suite explains why Scout24 yields membership subscription ARPU (~€873) >2x that of closest peers: Axel Springer, which has integrated portals Immowelt and Immonet, and horizontal classifieds platform Ebay Kleinanzeigen, recently acquired by Adevinta.

Rough math on Scout24’s wallet share of agent commissions: Prior to the current slowdown, the German market was estimated roughly as 626k annual transactions on average (per GEWOS, 2020). For a typical home price of €350,000 and 30k total agents, and assuming 60% of transactions go through agents, average transactions per agent in a year comes to 13. For a 4.5-6% commission, the average agent commission per transaction is €16-21k. With Scout24 spend per transaction ~€840, the implied wallet share of agent commissions is 4-5%, which is low relative to that of other leading global real estate market places such as Rightmove (UK) or REA (Australia). From an ROI lens, an agent spends €10.5k per year on Scout24 for membsership and will recoup that spend if at least one transaction is completed in the year.

Why is the business interesting now?

Scout24 has de-rated significantly along with other internet names, given the macro uncertainty and slowdown of the housing market with rising interest rates. A chart of EV/NTM EBITDA for Scout24 shown below has it trading at 14.6x EV/NTM EBITDA vs an average of ~19x since IPO, and ~17x in the pre-covid phase from IPO to the end of 2019. The peak and trough NTM multiples were 30.1x and 11.4x, respectively.

Source: Bloomberg, consensus estimates

From Scout24’s IPO (2015) to 2021, the German real-estate market was a seller’s market. Given low interest rates of the period, the housing boom came about as buying flats became popular for an otherwise risk-averse consumer. That changed to a buyer’s market now. With the economic turbulence of the war and rapid rise of interest rates in 2022, consumer confidence dimmed, and as expectations reset, real estate prices continue to soften from 2022 highs. In this period of macro uncertainty, mortgage originations declined by 21%y/y in Q32022 and 39%y/y in Q42022. These declines continued into 2023, with Jan 2023 -49%y/y, Feb 2023 -54%y/y per Bundesbank housing data. For more context around the German housing market, you can listen to the Hypoport 4Q2022 call. Hypoport was also written up on VIC recently.

Most real estate agents subscribe to 2 or more portals usually. In a buyer’s market, Scout24’s value proposition becomes more apparent, and it is likely a beneficiary of consolidation. Our industry checks indicate that some agents tend to prioritize Scout24 (despite the higher ARPU) in this macro, as landlords may want to make sure their listing is on the #1 portal. Agents grew 3% and professional ARPUs grew 7% in FY22 despite macro uncertainty. Now how will this play out if the market slows down further remains to be seen. We can model a few scenarios here, as we discuss below under valuation section. Recall that Scout24 has growing segments exposed to the rental market which should offset some of any continued weakness from home buying.

The margin opportunity could also be interesting. While Rightmove’s 74% margin is likely a stretch, we think the model has enough flex to target 60%+ margins from the current 56%, given operating leverage in the model and new revenue streams with relatively high incremental margins are expected to be monetized.

Valuation:

In the base case, we assume low double-digit EBITDA 2021-26E CAGR (similar top-line growth with modest margin expansion to reach ~58% 26E margin), and with an exit multiple of 16-17x (vs the current 14.6x) and discounting back at 10% for 2 years, we get to a $70+ price for 2024E. If interest rates and mortgage rates fall back from highs, and transactions pick up, our bull case factors 15% EBITDA growth and multiple expansion to long term average of 18-19x; that will get us to a $90+ 2024E PT. If EBITDA growth slows down to high-single-digit 5-year CAGR, at an exit multiple of 11-12x (lows of 2020), the stock has 15-20% downside. We view downside as mitigated in part by inherent hedges in the business model from exposure to the healthy rental market.

Risks:

1)      If the macroeconomic environment were to deteriorate severely from here, transactions could decline further and a large number of agents may exit the real estate business. This may increase agent churn on the platform and Scout24’s core will have to rely on ASP uplift from the new value-added services. The housing related weakness could partially be offset by strength in the private segment exposed to the rental market.

2)      Regulatory changes: If caps were to be imposed on agent commissions that will adversely impact earnings potential. Recently, laws were changed to make rental commissions payable by sellers only, so as to protect buyers. If this were to be extended to home sales as well, that may adversely affect seller appetite for Scout24’s products. Scout24 may have to develop more value-added services to retain sellers on its platform.

3)      Large scale M&A may pose integration risk and detract Scout24 from long-term goals set at the last capital market day.

Disclaimer: This post is not a recommendation to buy or sell a security but rather intended for a discussion of key bull and bear debates, based on research of public information, including company websites and regulatory filings. This post does not constitute professional or investment advice. Past performance is not indicative of future results. Consult with a licensed professional if needed before making any investment decisions. Investing in public markets can be subject to severe short-term and long-term risks, including resulting in permanent loss of entire invested capital. This post represents my personal opinions and not that of any other entity. I and/or entities that I advise can change views and positioning, at any point of time for any reason, or lack thereof, without any notice. I and/or entities that I advise are not and will not be held liable for any outcomes, including any indirect or consequential damages. I can be 100% wrong. This article has no guarantee to be accurate, complete, or current, and cannot be relied on as such. Please conduct your own due diligence.

Catalyst

1)      A potential recovery of the German housing market should accelerate growth of the platform

2)      Scout24’s product execution across home purchase and rental segments per plans laid out in CMD 2021