I became aware of Frontier Digital Ventures (ASX:FDV) whilst listening to an InvestSMART/Intelligent Investor podcast (1). Nathan Bell, a senior analyst at Intelligent Investor, who I respect greatly for his value based approach to stock selection, was espousing this stock. What piqued my interest was a "value guy" recommending a stock that had never made a profit. It was clearly time for me do some research of my own.
Frontier Digital Ventures (FDV) describe themselves as "experts in the online marketplace space", with a particular interest in property, automotive and general classifieds. As the name suggests they ply their trade in emerging markets. Their approach would align with that of venture capital. They provide not only funding but also operational and strategic advice to budding entrepreneurs.
Shaun Di Gregorio , founder and CEO, was formerly at REA group and later CEO of iProperty group. During his leadership at iProperty group the company achieved profitability and saw a 4000% share price appreciation. Patrick Grove and Luke Elliott are co-founders and investors in FDV. Both have significant experience in transforming early stage internet startups to profitability. These three individuals hold approximately 50% of the outstanding shares in FDV.
FDV share of portfolio revenue from investee companies increased 66% from FY 18 to FY 19. Four of the companies recorded positive EBITDA in 2019 (Zameen- Pakistan property portal, Infocasas- Uruguay, Paraguay, Bolivia property portal, iMyanmarHouse- Myanmar (surprise surprise!) property portal and Autodeal- Philippines automotive portal). Zameen is the most significant investment by revenue. FDV share of Zameen 2019 revenue was 12.7 m (2018 6.7 m). Second is Encuentra24 (general classifieds central America) with 2019 revenue of 3.4 m (2018 3.1 m). Property accounted for 76% of 2019 FDV revenues.
FDV sees numerous options to monetize its investment. These include:
1. Selling down to existing shareholders
2. Sale to financial investor
3. Tranche sale to new shareholders
5. Merging with a competitor
FY 19 Financial Statements
The companies FY 19 balance sheet has a book value of 54.7 m. Other intangible assets, Goodwill and investment in associates make up 41.6 m of the book value. The company has 0.9 m in non current liabilities and 12.4 m in cash and cash equivalents. Income statement reveals a loss of 3.8 m for the FY 19 (8.5 m loss for FY 18).Cash statement documents significant increase in investing activities over the last FY (payments for acquisition of subsidiaries, investments in associates and purchase of other intangible assets) totaling 8.7 m. Financing activities reveal 5.2 m raised in share issuance. Hence, positive cash flow is coming from share issuance rather than operating activities. The result is the fall in cash and cash equivalents to 12.4 m from 19.3 m.
April market update re COVID-19
Well timed sale of holdings in Propzy (at 300% return over 2.5 years) earlier in the year meant that the company was well cashed up heading into the crisis. This cash position will allow the company to take on opportunities as they arise. Overall portfolio revenue Q 1 20 similar to Q 4 19. A little tidbit worth noting in the Zameen section was that its parent company, EMPG, was involved in a merger valuing it at 1 billion. EMPG owns the other 70% of Zameen, not owned by FDV. Breaking down the actual Zameen component of that 1 billion is not a simple task as EMPG is a private company and does own other assets. Bell Potter have reviewed this merger in detail (2).
FDV is trading at 16.1 x stated FY 19 revenue. The "big boy" in online real estate classifieds in Australia is REA group limited (ASX:REA). It trades at 15.5 x its stated FY 19 revenues (and 59 x earnings).
FDV has excellent management. They have "skin" in the game and have demonstrated success in the recent past. That provides confidence that they will be able to monetize the various investments in the future. The balance sheet appears solid and profitability may be in the near future. Risk is reduced by the portfolio diversification across industry and region. Nevertheless, an investment in FDV is all about a belief in management. This will be a speculative buy for my personal portfolio. As it remains an unprofitable company, portfolio sizing will ensure that it will be a small investment.
Note- all currency in Australian Dollars
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