Trade Me earnings outlook revised down 4 percent for 2014, 2015 after first half disappoints

Tuesday 25th February 2014

Trade Me Group's forecast earnings have been revised down by about 4 percent for each of the next two years after New Zealand's largest auction site posted lower-than-expected first half profit as expenses increased at a faster pace than revenue and it warned future growth would be "subdued".

Analysts polled by Reuters have pulled back their expectations for 2014 net profit by an average 4.1 percent and for 2015 profit by 4.3 percent after Trade Me last week posted first-half profit growth of 1.7 percent to $38 million, missing expectations.

Trade Me has branched out from its core online auction web site started by computer consultant Sam Morgan in 1999 to also provide advertising for jobs, holiday accommodation and dating, and information on vehicles and insurance as it seeks to capitalise on its status as the nation's most visited web site and sell more products.

The company last week warned expenses will continue to accelerate at a faster pace in the second half of its financial year while revenue will grow only modestly as it adds more staff to bolster its service, spends more on marketing to attract users and tries to bring in more fees from selling new goods and raising prices for property listings. Profit growth should improve over the course of its 2015 year as it benefits from new products, higher fees and increased activity, it said.

Some analysts are betting the current spending in pursuit of growth could see the company post its first drop in annual profit since listing in 2012.

Trade Me's annual profit could fall to $78.3 million this year, from $78.6 million last year, according to the latest assessment from brokerage Credit Suisse following first half earnings. The broking house, which rates the stock "underperform", expects Trade Me to grow profits in 2015 by 9.3 percent to $85.6 million.

"The next six to 12 months will likely remain a period of heavy investment for Trade Me as it attempts to reverse a decline in the rate of revenue growth," Credit Suisse said in a note. "We expect acceleration in cost growth from 19 percent in 1H14 to 39 percent in 2H14 as Trade me increases investment in staff, marketing and content."

Revenue in Trade Me's General Items unit, the company's largest, declined 1.6 percent to $32.6 million in the first half, lagging 7.5 percent growth in the previous corresponding period and strong growth over the last five years, Credit Suisse said.

"New initiatives in General Items could arrest decline rather than accelerate growth," Credit Suisse said. "We remain cautious on the level of investment in new goods and whether this will produce reasonable returns."

Investors such as Mark Warminger at Milford Asset Management now rate the company as a mature business with low growth prospects, and say the stock is expensive. At current prices, Trade Me is trading at about 19 times its expected earnings when it should be priced around 14 times earnings, he said.

Chairman David Kirk said the company has embarked on a period of reinvestment which will impact short-term earnings growth but ensure the company's long-term growth. Kirk disclosed today that he has been buying the stock following the first half earnings announcement, adding 25,000 shares to take his total holding to 157,625 shares.

Shares in Trade Me recently advanced 2.7 percent to $4.14.

The mean forecast of analysts polled by Reuters is for 2014 profit of $82.3 million and 2015 profit of $91.4 million.

BusinessDesk.co.nz

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