Trade Me shares fall on outlook for slower earnings growth

Trade Me shares drop 4.2%, worst performer on NZX 50, as earnings seen slowing in 2014

By Tina Morrison

Aug. 21 (BusinessDesk) – Shares in Trade Me dropped to a two-month low after New Zealand’s largest online auction site said earnings growth would slow in the coming year as it invests more in its business.

Trade Me shares fell 4.2 percent to $4.50, making the stock the worst performer on New Zealand’s benchmark index today.

Earnings before interest, tax, depreciation and amortisation increased 12 percent in 2013 and growth is likely to slow in 2014 as the company invests in improving the performance of its core general items auction business, develops products and marketing for its classifieds section and looks to new business opportunities and revenue lines, the company said. Before today’s announcement, analysts were already expecting slower EBITDA growth of 9 percent in 2014.

“There is going to be a significant increase in the cost base and capital expenditure over the next year,” said Shane Solly, who helps manage more than $200 million at Mint Asset Management. “Trade Me is trading up to some extent - it will take time to see how the investment pays off.”

Trade Me profit rose 4 percent to $78.6 million in the year ended June 30, slower than the 8.4 percent pace a year earlier, the Wellington-based company said. Revenue rose 15 percent to $164.1 million as classified advertising sales surged 29 percent while fees from sales of general items rose 5 percent. Profit was just above First NZ Capital’s estimate of $77.6 million.

The company, which was spun out of Fairfax Media in 2011 in an initial public offering, said profit growth slowed in 2013 reflecting higher interest costs following its IPO and because of a $3.3 million one-time gain the year earlier. Finance costs increased 78 percent to $7.2 million in 2013.

Trade Me, which has attracted about two thirds of New Zealand’s population to its online marketplace, is adding to its core auctions business to drive future growth. The company said today it has agreed to buy online insurance comparison business LifeDirect, adding to its purchase of inventory management company Tradevine and holiday rental accommodation website Holiday Homes in the past year.

“We expect to grow top line revenue and bottom line earnings but these will reflect slower growth than we’ve recorded this year while we focus on reinvestment in the business,” said chief executive Jon Macdonald.

The company is optimistic it can boost the performance of its general auction site, where sales of new goods failed to meet expectations.

Some 40 percent of all visits to Trade Me are from mobile devices and the company is developing technology applications to meet the demand, the company said.

“Growth in mobile, new products in the classifieds, the migration of advertising yield online, the long-term opportunity in online retail and forays into new businesses all provide sizeable opportunities for Trade me over the coming years,” Macdonald said.

The migration of online activity to mobile devices constitutes “both an opportunity and a threat to us,” the company said.

Trade Me’s expenses rose 13 percent to $40.7 million in 2013 as it took on new staff to accelerate product development, taking total staff to 316. The company expects to add a further 30 to 50 people in 2014, not including the 11 staff it expects to take on when it finalises the purchase of LifeDirect in September, Macdonald said.

The company will pay a dividend of 8.3 cents a share on Sept. 24.

(BusinessDesk)

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