Trade Me in good health, analyst says

TRADE Me is in sound financial health but its revenue and profit growth is affected by economic conditions in New Zealand, Morningstar analyst Gareth James says.

The company reports its financial results this morning.

Consequently, a slowdown or an economic downturn could cause a decline in activity across Trade Me’s key businesses.

Trade Me’s brand image and credibility could be affected in the case of a breach of privacy or fraud, which could affect the confidence of its users, undermining revenue in the process.

‘‘Trade Me is also at risk of failing to navigate and adapt to changes in online consumer habits and preferences. The company boasts a strong management team and the departure of key management personnel in quick succession would be detrimental.’’

Trade Me had struggled with margin contraction in recent years, with earnings before interest and tax (ebit) margin contracting from 79% in the 2011 financial year to 56% in 2016, Mr James said in a research note.

The contraction was attributed to the maturity of the general items division, as well as to reinvestment of profits to address competitive pressures. However, capital expenditure requirements were likely to decline following a period of elevated investments, enabling margins to stabilise.

Revenue had grown at a compound annual growth rate (cagr) of 12% during the past five years and Morningstar was forecasting a cagr of 7% for the next five years, underpinned by growth in the classifieds business.

Signs of earnings improvement were evident in the 2016 financial result, with ebit growth improving from a 0.3% fall in the first half to 4.3% growth in the second half. Automotive classifieds were expected to be a key driver of growth in the 2017 financial year, he said.

‘‘Trade Me’s balance sheet is in good shape thanks to the capitallight nature of the business model and we expect to stay that way.’’

Net debt was only $102 million at June 30, 2016, with the net debt/operating profit ration ‘‘very manageable’’ at 0.7 times and expected to fall to 0.6 times by the end of the financial year.

Cash conversion (operating cash flow less capital expenditure/net profit after tax) usually exceeded 100% although the first half could be weak due to the seasonality of some payments, such as tax, Mr James said.