Intelligent Investor - Portfolio Trades (TME - BUY), page-38

Hi guys, i got that from a research report from a big NZ stockbroker. Coincidentally a friend told me she had sold her car through Facebook citing the ease and no layers of fees. I had a look at my local Facebook trading section and was surprised at the number of listings. How much impact and how fast it is growing ,i can't add further detail. Amazon another competitor on the horizon but this may all be factored in to the s/p.TradeMe certainly is a very successful incumbent here.


@Dejavoo,

Yes, Facebook is not a force to be underestimated nor trifled with.

But the very existence of Facebook is part of the reason the TME is trading at 10x EV/EBITDA today, and not >13x, as it was some time back.

And the existence of other players in the markets that TME services should be viewed in the context of what is happening in the broader industry dynamic, notably how relatively small online transactional business still is in New Zealand today and, therefore, how fast it is growing.

At expense of traditional media, such as print and television. Just like we had happen in Australia over the past decade.

Which means that for TME – and its competitors – the opportunity Revenue set is growing structurally, and at a faster rate than that at which TME is likely to cede market share.

Put another way, despite the arrival onto the scene of new participants, the Aggregate Revenue pie is growing fast enough that it still provides Revenue tailwinds.

And that’s even assuming TME loses meaningful market share… which, given its brand resonance, and first-mover incumbency – is by no means a certainty.

The way to monitor this hypothesis is to look at what the actual numbers are telling us.

Here are the HALF-ON-HALF Revenue growth numbers for TME’s business segments, over the past two years:

GENERAL ITEMS (30% of Group Revenue):
DH15: 0.1%
JH16: 7.0%
DH16: 9.3%
JH17: 5.1%

CLASSIFIEDS (53% of Group Revenue):
DH15: 13.9%
JH16: 12.5%
DH16: 9.9%
JH17: 12.6%

OTHER (17% of Group Revenue):
DH15: 11.7%
JH16: 5.0%
DH16: 5.1%
JH17: -7.5%

Admittedly, where some competitive pressure might be seen to be having an impact is on TME’s operating margins, which had been declining since listing (from about 72% in FY2011, to 56% in FY2016, from which they appear to have stabilised in FY2017, at 57%).

But this margin compression has been more than offset by far due to the rapid organic top-line growth, resulting in reasonably-strong EBITDA growth:

HALF-ON-HALF EBITDA GROWTH:

GENERAL ITEMS (34% of Group EBITDA):
DH15: -1%
JH16: -4%
DH16: 8%
JH17: 6%

CLASSIFIEDS (56% of Group EBITDA):
DH15: 11%
JH16: 17%
DH16: 12%
JH17: 11%

OTHER (10% of Group EBITDA):
DH15: -9%
JH16: -8%
DH16: 19%
JH17: -10%

TME GROUP:
DH15: 3%
JH16: 6%
DH16: 12%
JH17: 8%


My sense is that the market has become somewhat spooked by the Facebook/Amazon threats - which certainly make for great and catchy media headlines - but I'm not sure that they will wreak the sort of havoc that the "shoot-first-ask-questions-thereafter" response from the market is implying.

Again, this is not a multi-bagger investment.
Rather, it is a 12% to 15% pa return proposition, for which the risks have been somewhat over-egged, I think.

Often, I make investments which - at the time of my making them - feel even to me like, while they might appear to reasonably attractive, they are certainly not "shoot-the-lights-out" exciting.

But then, two or three years later, when I reflect on them, I often find myself saying, "Wow, that turned out way better than I had initially anticipated."

I won't be surprised if that ends up being the case with TME, too.