Trade Me now free from the Fairfax shackles has significant upside potential

Investor Relations – Trade Me Group Ltd.jpg

This blog is primarily about property; the property market and real estate, although at times I allow my mind to wonder and consider and analyse related areas. This post is just such an exercise.

I followed with interest over the weekend the decision by Fairfax to sell down their remaining stake in Trade Me – in my mind a decision akin to “selling the engine to pay off the car loan" as I tweeted !

I think the winner is Trade Me, unshackled from its rudderless parents now free to demonstrate the online powerhouse it can be – the question though is how big could it be. Some of the recent articles have commentators pouring cold water on upside potential and sensing (judging) that its “trading position may not be so great”.

Now I should be very clear here, I am not a financial analyst, I do not own shares in Trade Me and I would not recommend, nor take anything I say hear as investment advice.

I do think Trade Me has a significant upside – the current share price is $4.02 as of today gives it a market cap of $1,591 million – a very healthy premium to the $700m Fairfax paid for the company in 2006. Some of the recent articles have speculated that the recent high of $4.45 back in late October giving the company a valuation of $1,761 million was a sign of the share price "running ahead of itself". I think in time the market cap could well exceed $2 billion in today’s money.

On what basis can I make such an assertion? I have simply looked at some benchmark companies in an area I know a lot about – real estate.

Trade Me Property is a very successful part of the company – it dominates the viewing of online property with over 1.5 million unique visitors a month and an average on sit duration of over 20 minutes. It's not a monopoly as Realestate.co.nz is very successful and holds a credible #2 position, however it would be a brave property seller in NZ today who did not ensure that their listing was on Trade Me Property.

Benchmarking the online property market is fairly easy and my two examples would be Realestate.com.au in Australia (Part of , well about 90% of the REA Group) and Rightmove in the UK. Both are listed companies and therefore publicly accessible information.

The Australian real estate market is more advanced in online than NZ, there around 30+% of media spend is online as compared to about 15% here, in the UK it is around 20% although the real estate market is less advertising focused as commissions are lower and this results in a lower media spend. Both of these companies are more succesful at EBIDTA margin than Trade Me delivering in the case of Rightmove 70% levels.

Using a very simple calculation method based on comparable populations and local currency conversion; the current REA market cap of A$2,289m equates to a NZ$557m real estate online business in NZ terms. Rightmove with a market cap of £1,523m equates to NZ$206m real estate online business in NZ terms. This reinforces the point made earlier about the powerhouse that REA is in the Australian real estate market. For this reason I have applied a weighting factor to arrive at a final weighted price for Trade Me with an up weighting of REA by 26% and a down weighting of Rightmove by 52%.

The table below summarises this data:

Trade Me benchmarking Dec 2012 #1.jpg

Whilst benchmarking, I examined two other specialist category sites in Australia, the listed Australian car trading site of CarSales.com.au and the recruitment site of Seek. Both are dominant players in their respective categories and thereby provides a category benchmark for both Trade Me Motors and Trade Me Jobs. Trade Me dominates the NZ car sales market, and is fighting a strong battle with Seek in the jobs market. The current market cap of CarSales.com is A$1,754m which equates to a NZ$427m car sales online business in NZ terms. I see CarSales.com.au as very similar in its sector as a benchmark to REA Group and therefore have developed an up weighting of 12%.The current market cap of Seek is A$2,343m which equates to a NZ$570m jobs online business in NZ terms. In principle whilst Trade Me is not as dominant as Seek in jobs there is no reason to down weight it's representation in evaluating a weighted valuation for Trade Me so I have up weighted it by the same 12%.

Now to determine how each of these sector specific benchmark companies contributes to an overall estimation of the value of Trade Me I have examined what I see as the current split of business between the core sectors of Trade Me – Property, Jobs, Cars and Classified / Retail. At this time I see the split as 16% for Property, 10% for Jobs, 29% for cars and 45% for classified. In future I see this changing. The future representation is also shown in the table below.

Trade Me benchmarking Dec 2012 #2.jpg

To come up with a overall calculation for the value of Trade Me I have taken the future split of business and applied this to the sector benchmark valuations to then come up with an overall valuation of just over NZ$2.3 billion based on the weighting. It's not the most scientific analysis but I think it is interesting.