Tuesday, November 15, 2011

Trademe IPO: A Closer Look

TradeMe Ltd [TME.NZX] has been a major success by anyone's standards. An online auction site that dominates the New Zealand auction market and one of the most popular websites in the country.

It has also done well for its original founders when sold around five years ago for around NZ$750 million and well for the current owner Fairfax Media Ltd [FXJ.ASX] who are going to sell 34% of it to raise money to pay off its huge debts.

As I said above TradeMe dominates in just about every sector that it does business in and has done well to grow revenue and profit over the last few years by raising auction fees and participating in new sectors.

The question is though, can TradeMe continue on into the future the way it has in the past and will its current market dominance be diminished by competitors or new technology in the fast paced and quickly changing delivery mechanism that is the internet?

Management at Fairfax have put an IPO value on the company of $1.069 billion of which approximately $363.5 million are the proceeds of the partial sell-down of approx 34% of the company and the balance is to be majority owned by Fairfax which will have a 66% holding. Shares will be $2.70 a piece.

Lets take a closer look at this IPO to see how the numbers stack up.

Like many recent IPOs in New Zealand this one comes with a debt mountain courtesy of its parent. TradeMe lent Fairfax $192.7 million in 2010 and paid out $220 million in dividends in 2011, according to just-released financial statements. So they milked it to keep Fairfax afloat over the last 2 years and are now set to have a third squeeze during this IPO by pulling in $529.5 million, with Fairfax netting about $363 million with $166 million of new debt to languish on TradeMe books.

TradeMe has done well but we must remember what has got its parent into financial trouble - debt.

Lets have a look to see how TradeMe can cover that debt.

Trade Me recorded a profit of $69.7 million in 2011, up from $63.6 million in 2010 and revenue came in at $128.8 million, compared to $114.4 million in 2010. Profit and revenue is rising, so that is clearly a promising sign but with a $166 million debt to service they are going to need increasing revenues.

Trade Me is forecasting pro forma earnings (I must add pro-forma figures are highly misleading and I will not use them further in this post because they are largely meaningless) before interest, tax, depreciation and amortisation (ebitda) of $104.8 million in 2012, up 8% from $97 million in 2011, rising to $110.9 million in 2013.

It expects to make a profit of $65 million in 2012 on revenue of $144.8 million, up 12% from $128.8 million in 2011. Revenue is forecast to increase to $154.1 million in 2013, with profit rising to $68.5 million.

A much better indicator of where TradeMe might be headed in the future comes from a five year historical summary of statement of income (as audited) from 2007 -2011:

The numbers above look good and should be the ones looked at by prospective investors when deciding to buy shares.


The TradeMe IPO is one that will be very popular with investors and is likely to be over-subscribed when it comes to its expected listing date on December 13. The high debt of $166 million on its books is a drawback the company could have done without but if its past performance is anything to go by it should be able to be serviced adequately.

Watch for the majority owner though trying to continue to milk its only profitable asset by extracting overlarge dividends this time rather than loans to the parent.

This company will be watched closely and the IPO price should be easily beaten on listing day because of its wide brand recognition and the part it plays in many of our lives. The really interesting thing to watch for though will be its long term prospects.

I wont be investing but this is a reasonable investment based on its past performance, investors need to be wary though that its past record of good growth is unlikely to continue for the long-term and there will be bumps along the way.

TradeMe Ltd@ Share Investor

TradeMe Prospectus

Discuss TRE @ Share Investor Forum

From Fishpond.co.nz

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c Share Investor 2011