Thursday, September 7th, 2017
ASX code: TME
Share price: A$4.20
Industry: Online marketplaces
Forecast FY2018 Distribution: A$0.19, unfranked
New Zealand’s go-to online marketplace Trade Me Group (ASX:TME) looks interesting after the company’s tempered outlook statement contributed to a sell-off over August, which has seen almost 20% knocked off its market value.
This is a rare opportunity for Dividend Detective, as online classifieds darlings REA Group, Carsales and Seek trade on low yields, which precludes them from this column. However, following recent share price falls TME trades at a relatively low 18 times 2018 earnings and offers a reasonable forward yield of 4.4%. Further, TME goes ex-dividend on Thursday 7 September with a A$0.092 final dividend. Including this, over the next 13 months investors should receive income returns of about A$0.28, which translates to a 6.7% yield.
In Australia the big three basically own the markets for homes, cars and jobs. Owing to the network effect, each holds captive audiences, which they continually monetise by tweaking their platforms to increase competition among advertisers for attention from buyers.
Across the ditch TME is like the All Blacks of online marketplaces, with an entrenched position across homes, cars, jobs and consumer goods. TME’s website, trademe.co.nz, is the 4th most visited in New Zealand, behind Google, Facebook and Youtube. It receives 32 million visits per month, and boasts exceptional audience engagement with average time on site of 10 mins and 14 pages per visit (SimilarWeb).
Although TME faces strong international competition from the likes of REA, Seek and even Facebook and Amazon, its healthy brand awareness and user engagement has TME positioned to further monetise its platform and increase market share. As a rule of thumb, the strength of network effects is indicated by the level of marketing required to drive growth. TME spent approximately 5% of revenue on marketing in 2017, which was about half the rate of REA Group.
Results for fiscal year 2017 were in-line with consensus, with underlying earnings growth of 12% outpacing revenue growth of 8%. The bright spots were the online classifieds verticals, which collectively grew revenues by 11% on the back of higher yielding Premium products. Jobs was particularly strong boasting a 25% increase in revenues.
The market responded negatively to guidance of a reversal in fiscal year 2018 siting cost growth of around 10% versus revenue growth of 7%. However, we weren’t so disheartened as TME is reinvesting to defend its position and capitalise on the structural growth opportunity in New Zealand, where the shift in advertising spend from print to online lags Australia by a few years. We see value emerging below $4.00.
Jonathan Wilson is an Analyst for the Clime Smaller Companies Fund
Clime owns shares in Seek.