Frontier Digital Ventures: Re-emergence

About the author:

Anthony Porto
Author name:
By Anthony Porto
Job title:
Senior Analyst
Date posted:
26 August 2021, 10:00 AM
Sectors Covered:
Online, Emerging Tech

  • FDV continues to exhibit positive momentum with the majority of businesses now seeing a sustained rebound out of COVID induced lows. 1H portfolio (PF) revenue growth of 46% on a constant PF basis (+86% incl acquisitions) included +132% in Q2 (on a materially impacted pcp).
  • July trading shows improving momentum with PF rev +9% on June and +13% on the Q2 average. Larger businesses Infocasas (+23% mom in June) and Zameen (first time >A$5m rev in month) were specifically called out as performing well.
  • FDV continues to target increasing involvement in the transactional ecosystem, disclosing transactional revenue at 48% of 1H PF rev. With the Adevinta acquired assets ostensibly having no exposure to this revenue stream, this remains a large opportunity to improve topline growth.
  • We retain our Add rating, with our valuation/TP increasing 2% to (login to view).

1H21 and July trading show momentum out of COVID lows

1H PF revenue growth of 86% (+148% on FDV share basis given acquisitions), 46% on a LFL basis (+39% on a FDV share basis) was strong and driven by +132% Q2 growth (FDV basis, cycling COVID lows).

2Q average PF monthly revenue of ~$8.9m was up 12% on 1Q, with July’s $10.0m figure up another 12% on the 2Q average. EBITDA loss of $3.84m (incl corp costs) was slightly above our $3.7m loss estimate given higher corporate costs.

Transactional opportunity meaningful for acquired assets, large consumer base a key strategic benefit

FDV has for the first time disclosed the aggregate proportion of transactional revenue (facilitating aspects of the real estate, auto, general goods buying experience) for the portfolio at 47.9% in 1H (we assume ~27% ex Zameen).

With the acquired Adevinta assets having almost no exposure to this revenue stream, this remains a compelling opportunity to accelerate growth in these businesses.

FDV is not alone on this front, with capital chasing the transactional opportunity, including the likes of Colombian based LaHaus who have just raised US$100m from the likes of Jeff Bezos. The key strategic advantage FDV generally has is a strong consumer following, evidenced by FDV’s Fincaraiz having a 9.6x traffic advantage over LaHaus over the past 6mths (SimilarWeb data).

A strong consumer brand and offering is a key reason behind Carsome’s recent tilt at ICQ, and a reason why we believe CAR will ultimately prove successful in their push to facilitate e-commerce on the Carsales site.

Forecast and valuation update

We make minor positive changes to revenue estimates in the forecast period, but increased investment (product, platform and marketing) sees us reduce PF level EBITDA by 21% ($700k), 7% and 2% in the forecast period.

With $25.5m of contingent consideration (mainly Infocasas) on the balance sheet and an $18.7m cash balance, we have FDV requiring ~$15m of funding (assumed debt) within CY23 (we believe FDV has numerous avenues to plug this gap).

Our valuation increases 2% to (login to view) with a 3% increase in our SOTP valuation (mainly Infocasas) to $1.53 and 1% to DCF ($1.81).

Investment view

We remain attracted to the long term growth potential of the FDV portfolio, backing management to continue to execute on the strategy of improving the consumer proposition and diversifying revenues streams away from pure classifieds.

We continue to see FDV’s ~8.8x EV/EI Revenue multiple as attractive given recent valuation data points (ICQ acq @ ~12x, Property Guru SPAC at ~17.8x).

Price catalysts

3Q trading update, strong topline growth and evidence of margin leverage/breakeven EBITDA at company level.

Portfolio optimisation (both acquisitions and potential divestments/vend in of existing assets).

Risks

Political, economic and regulatory risk in emerging economies, competitive intensity, minor funding risk given FDV not CF positive and contingent liabs.

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