Analyst sees Trade Me risk factors

While Trade Me is performing well, its future performance could be undermined by a Fairfax Media bid to extract cash from the company, Woodward Partners analyst Nick Lewis told NBR. And while EBITDA growth remains spectacular, growth has slowed.

Trade Me recorded a strong result yesterday for the six months to December 31, broadly in line with its prospectus targets.

Reporting for the first time since Fairfax Media floated a one-third stake on December 12, the auction site reported a net profit of $36.4 million half-year profit, up 5% on the same time last year.

EBITDA of $52 million was 2% ahead of forecast - and a new record for the company.

Revenue was up 13% to $70 million.

“It was good to see growth both in volume and pricing, despite difficult economic conditions,” Mr Lewis said.

The analyst expected increasing adoption of smartphones to help drive Trade Me growth over the next few years.

Last year, Trade Me released an iPhone app. Earlier this month, that was followed by an Android app.

Speaking to NBR yesterday, Trade Me CEO Jon Macdonald said many large companies had blocked the auction site from their workplace networks, regarding it as a “time sink.”

But the spread of smartphones meant many employees now simply browsed Trade Me on their mobiles.

Trade Me’s Treat Me was now number two in the daily deal market (behind APN’s GrabOne). Some months Treat Me was profitable, others not, Mr Macdonald told NBR, depending on its level of promotional activity. Looking ahead, as the daily deal market shook out, he expected it to be profitable all the time.

Mr Macdonald also reported strong growth of new goods, which now account for 40% of Trade Me sales.

The CEO wants more retailers to sell goods through Trade Me (he details his plans here).

Revenue was boosted by an increase in fees for premium listings, and a new charge for withdrawing an auction. Trade Me Motors premium fees were also raised, for a 41% year-on-year revenue increase, in line with a strategy (previously outlined to NBR by chairman David Kirk) of lifting rates in classified verticals such as Trade Me’s jobs, cars and property sections, which still charge less than print rivals.

Now the bad news
“Trade Me’s EBITDA margins are in the mid-70% range,” Mr Lewis said. “They are still very strong, but less than they have achieved in the past, confirming our view that Trade Me has reached its mature growth phase.”

The Woodward Partners analyst said he was also wary of “on-going difficulties” at 66% shareholder, Fairfax Media (which has previously tapped Trade Me for a parent company loan and $220 million dividend, and allocated $166 million of debt to the auction site at the time of its IPO).

Fairfax Media’s share price has dropped 43% over the past 12 months. The company made an after tax loss of $A400.9 million in the year to June 2011 after writing down the value of its mastheads, customer relationships and goodwill by $A650.7 million. A key reason behind the Trade Me partial float was to reduce Fairfax Media’s $A1.5 billion debt mountain.

“If Fairfax’s financial condition degrades further, there could be increasing pressure from Fairfax to extract more cash from Trade Me, possibly by leveraging Trade Me’s balance sheet and distributing a large one-off dividend, then having to service that new debt by reducing the annual dividend after that,” Mr Lewis said.

“We are not overly concerned yet, but it is a risk factor we are watching.”

One factor that could help Trade Me's balance sheet from being pillaged by its troubled parent is that founder Sam Morgan is now on Fairfax Media's board.

RAW DATA: Trade Me's presentation to analysts (archived webcast; audio with slides)