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Trade Me Group Limited TME
June 21, 2017 - 10:34am EST by
genoa321
2017 2018
Price: 5.10 EPS 0.22 0.24
Shares Out. (in M): 397 P/E 23 21
Market Cap (in $M): 2,025 P/FCF 20 18
Net Debt (in $M): 98 EBIT 126 140
TEV (in $M): 2,124 TEV/EBIT 17 15

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Description

Trade Me Group controls an excellent collection of well-positioned/dominant online marketplaces and classified businesses, including what are effectively the New Zealand versions of eBay, AutoTrader, Monster, Carfax and more. These businesses generally benefit from significant competitive advantages derived from operating two-sided networks with local scale. Trade Me is not a “typical” tech company: the company is very profitable (mid-60% EBITDA margins) and pays a meaningful dividend (3.4% yield). I think TME is worth around NZ$6-7 per share, including the accumulated dividend, based on my forecasts for FYE 6/2019. This corresponds to a high single-digit to mid-teens return.

 

First, it helps to understand the company’s history. Trade Me was founded in 1999, acquired by Fairfax Media (FXJ AU) in 2006 and had its IPO in December 2011. Fairfax Media completely exited the stock in December 2012 to help reduce its financial leverage. It’s important to note that during Fairfax’s involvement in TME, FXJ’s stock declined from around A$4 to a low of near A$0.50.

 

Trade Me is currently entering an inflection point in earnings growth. The company was generating nearly 80% EBITDA margins around the IPO, which was likely unsustainable (management notes the product was “dated” and “substandard”). Around 3 years ago, the company began a multi-year investment program which resulted in expense growth outpacing revenue growth. We are now approaching an inflection point -- in the first half of FY 2017, revenue growth outpaced expense growth for the first time in quite some time(8.8% vs. 5.0%). The company thinks they are now at sustainable margins (EBITDA margins are roughly in the impressive mid-60% area). As shown in the table below, I’m forecasting revenue and EBITDA growth to be roughly equal going forward.

 

 

The company reports three segments: General Items (35% of EBITDA), Classifieds (55%) and Other (10%).

 

General Items is the Trade Me website (http://www.trademe.co.nz/), which is is a marketplace for auctions and fixed price transactions of new and used goods. The business is very similar to eBay -- it earns revenue from listing fees, premium fees and success-based fees. The company has ~90% market share in the NZ online used goods market and benefits from a significant moat (network effects). The company has decent share (9%) of online new goods. Trade Me primarily faces competition from strong global competitors, including Facebook and Amazon.

 

Classifieds includes three verticals: Motors (52% of revenue), Property (28%) and Jobs (20%). Classifieds earns revenue primarily from listing fees.

  • Trade Me Motors is the leading online automotive classifieds service in New Zealand with around 60% market share (print still has 29%). The segment also includes MotorWeb, a provider of vehicle history data (similar to Carfax which is owned by IHS Markit). The Motors business is similar to AutoTrader.

  • Trade Me Property is the leading online real estate classifieds service in New Zealand with around 25% share (print still has 50%). The main online competitor is realestate.co.nz. The Property business is similar to the ones owned by REA Group (REA AU).

  • Trade Me Jobs is a leading online jobs classified service with around 29% market share (print still has 33%). Jobs primarily competes with Seek (SEK AU) and is similar to Monster and CareerBuilder.

 

Other includes advertising, insurance comparison and payments. Trade Me also has an equity investment in Harmoney, a NZ peer-to-peer lending service, which is currently a negative contributor to EBITDA. I’m essentially valuing Harmoney at zero for now.

 

The collection of businesses derive their value from the New Zealand economy. I don’t have a view on the New Zealand economy but I’ve seen GDP forecasts of around 2.5-3.0% for the next few years (i.e., http://www.treasury.govt.nz/budget/forecasts/befu2016/008.htm).

 

Below is a summary of my financial model through FY 6/2019. I roughly estimate high single-digit revenue growth driving similar levels of EBITDA growth. Over this time period, I expect the company will de-lever to roughly zero net debt. I value the business using a blend of multiples: 20-22x P/E, 12-14x EV/EBITDA, 14-16.5x EV/EBIT.

 

 

 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

Moderation of expense growth

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