Ann: Half Yearly Report and Accounts, page-3

"Strong revenue growth in classifieds and the divergence in growth between classifieds and market place has continued. As the classifieds grow, I would also argue the business quality of TME improves as a whole. Overall the result seems a good quality one and consequently I felt it was worth adding to my holdings at these levels. The revenue growth was particularly pleasing and with a strong balance sheet, mid single digit growth and 5% yield the investment appears attractive. Would be curious to hear what you think of the result @madamswer."

@andy777,

In terms of the quality of the result, I agree with you.

The result is significantly understated, I think, due to the meaningful investments being made in the business. I think today's reported result could easily have been 5% or 10% higher.

Of course, one needs to form a judgement on the quality of that investment being made, and whether it will enhance TME's relative competitive positioning, or whether it is more defensive, i.e., loss-avoiding, in nature. Knowing the company, and having seen the way it is managed, I'm inclined to thinking it is a case of 75%; Offensive, and 25%; Defensive, if that makes sense.

To my way if thinking, this is a highly cash-generative, 8%-10% pa growth business, with meaningful leading market position and strong brand resonance. It is very well managed.
Sure, it operates in a marketplace that is dynamic and competitive, but it has a big head start on any wannabe competitors, thanks to some unique smarts along with the scale advantages of being a first-mover.

Add all that together, and what you get is a definite premium-to-market business.

Valuation-wise, it therefore warrants premium-to-market valuation metrics.

Trouble is, based on my modelling, it is trading on a prospective, FY2019 P/E multiple of around 16.0x to 17.0x, and EV/EBITDA of around 10.5x. Its prospective dividend yield is close to 5%.

So, all-up, I think the room for further upward re-rating of the stock's valuation multiple is limited.

When I first acquired TME some 6 months ago, my opinion was that it was not going to be an investment which would see 50%, or 40% (or even 25%) capital appreciation. Rather, it was a 12% to 15% total shareholder return proposition (7% to 10% pa capital appreciation plus 5% annual dividend [*]).

That is, a low-risk, modest-return sort of investment.

Nothing has changed with that initial view.


[*] PS. To date, 6 months into my TME shareholdership, I've received the dividend component, but nothing of the capital appreciation bit as yet.