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Trade Me shares tumble on slower earnings growth

Trade Me shares tumble to 19-month low on slower earnings growth

By Tina Morrison

Feb. 19 (BusinessDesk) – Shares in Trade Me Group fell to a 19-month low, making the stock the worst performer on the benchmark NZX 50 Index, after New Zealand’s largest online auction site posted lower-than-expected first half profit, raising doubts about its future earnings growth.

Trade Me shares fell as low as $3.68, and recently traded down 6.2 percent at $3.80.The Wellington-based company said first half net profit rose 2 percent to $38 million, slower than the 2.7 percent earnings growth in the year earlier period and below First NZ Capital’s estimate of $40.9 million.

Trade Me employed an extra 50 people in the past six months, taking its total headcount to 350, as it strives to improve its web site, adding more services and functions, in order to grow future profits. Expenses rose 19 percent to $25.2 million, outpacing 6.6 percent revenue growth to $85.7 million. In the second half, the company expects expenses will continue to accelerate at a faster pace while revenue will grow only modestly, leading to “subdued” full-year earnings growth.

“It was a weak result, revenue growth was far lower than expected whereas growth in expenses was quite high, which really meant that net profit was pretty flat so that was very disappointing,” said Mark Warminger, who helps manage $710 million in New Zealand equities at Milford Asset Management. “There is going to be material downgrades right across the board for this year and for next year. It doesn’t really look like the business is going to turn around any time soon especially with poor revenue growth and higher costs going forward.”

Milford sold down its holding in Trade Me, which was spun out of Fairfax Media in 2011, after the shares reached around the $4.50 to $5 level, believing the stock was expensive for what the fund manager considered a low growth company.

The stock is currently trading at around 17 times its expected 2014 earnings, when it should be trading around 14 times earnings given its growth and maturity, Warminger said.

Revenue growth in the latest period was the most disappointing aspect of the result, Warminger said.

Sales from general items fell 1.6 percent as it suffered increased competition as a high New Zealand dollar made new goods from overseas websites more competitive than many second-hand goods from Trade Me, Warminger said.

Trade Me is struggling to boost revenue from new areas, such as the sale of new products through its web site better known for second-hand goods, and its plan to increase fees that real estate agents pay for listing properties through the site, Warminger said.

“Really what it is looking like at the moment is a mature business which is having poor earnings and it is trading on a high valuation which is never a good combination,” he said.

Trade Me reiterated today that it expects stronger profit growth over the course of its 2015 financial year. Before today’s earnings, analysts were expected the company to increase full-year profit 7 percent this year, before picking up to an 11.2 percent pace in 2015, according to analysts polled by Reuters.

“We’ve embarked on a period of reinvestment which will impact short-term earnings growth but ensure the company’s long-term growth and success,” said chairman David Kirk. “We are convinced this is the right approach for Trade Me and we believe investment now will result in stronger market positions and greater growth opportunities in the future.”

Investment in the business had gone well and Trade Me will continue to “invest assertively” in the second half of the company’s financial year, Kirk said.

Trade Me will pay a first half dividend of 7.6 cents a share on March 25.

(BusinessDesk)

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