Why we prefer to hold, and not TradeMe

Why we prefer to hold, and not TradeMe

TradeMe is New Zealand’s leading online marketplace. It’s like eBay, REA, CAR and SEK all rolled into one. Having upgraded its trading platform, the company is set to return to strong earnings growth from FY17. TradeMe fits a number of our preferred investment characteristics, and we continue to hold it in our funds.

TradeMe dominates the used goods trading market in New Zealand, with eBay itself having a very small share. TradeMe has been able to leverage the traffic flow this site has generated to build other platforms with similar barriers to entry through the virtuous circle of consumer traffic resulting in vendor participation, which in turn drives ongoing consumer participation.

Today, TradeMe is the leading used goods marketplace in New Zealand, and has the number one online auto classifieds site, as well as the number two property (number one by revenue) and employment classifieds sites. It is also developing a number of other product platforms including insurance.

The company has gone through a much needed reinvestment cycle over the last few years, which has improved the look and user experience of the site. On the classifieds side of the business, the strategy has been repositioned to one in which the company focuses on adding value to the advertiser, while driving yields through premium products rather than outright price increases. This is more in line with the strategies of REA, CAR and SEK in Australia.

The benefits of the reinvestment are starting to be seen in the recovery in real estate listing shares, growth in premium classified product penetration, strong growth in product listings on the marketplace site, and more recently a significant uplift in general merchandise sales. This bodes well for continued strong organic revenue growth.

With most of the step-up in investment having flowed through to the FY16 result, cost growth is set to slow. This will see the company return to earnings growth from FY17. The limited amount of capital invested in these sorts of businesses means the marginal return on capital from this growth is very high. This means free cash flow generation remains high through the growth phase.

The FY16 result reported a couple of weeks ago was in line with our expectations, with good revenue growth in both the market place site as well as the classifieds businesses.

Of particular note has been the continued strong growth in merchandise sales on the site through the 6 months to June 2016 and into July and August. This is despite the business cycling stronger growth numbers in the previous corresponding period, and TradeMe pushing through a price increase in February. This price increase will provide a more significant benefit to revenue and earnings growth in FY17.

In the medium to longer term, the classified business will be the primary driver of growth, with increased penetration of premium product uptake replacing the previous strategy of straight price increases to drive yield.

There is a long runway for growth in the classifieds business given the relatively low displacement of print classifieds to date in New Zealand relative to other developed markets. As such, TradeMe is likely to benefit from a number of years of revenue growth in classifieds before it needs to focus on the more investment intensive data analytics that SEK and REA are developing at present.

The Montgomery Fund and the Montgomery [Private] Fund own shares in TradeMe.