Description

BCG was written up earlier this year as part of a reactivation attempt. However, we believe that this investment opportunity's highly attractive nature can be best illustrated with the online classifieds' industry context. 

SUMMARY

Baltic Classifieds Group is a well-run operator of online classified assets that are uniquely dominant across Lithuania and Estonia but are early in monetization relative to mature peers. Earnings growth through improved monetization, the prospects of expansion into Latvia and appeal to private equity buyers make BCG a compelling investment. 

ONLINE CLASSIFIEDS

Online classifieds, the country-specific marketplaces for goods and services, are winner-take-all (or most) businesses powered by the network effect (a tangible flow of visits and listings whereby buyers and sellers attract each other) and brand recognition (an intangible asset developed over time). Classifieds can be either “generalist” or “vertical” – the former enable various C2C transactions with one-off listing fees, while the latter facilitate high-value B2C and C2C transactions in Real Estate, Autos and Jobs, and monetize through subscriptions, listing fees and other services.

Several leading classifieds have developed as newspapers’ extensions or online upstarts since the dawn of the Internet. In some small countries, a sole operator controls both the generalist category and the verticals. The best-known example is Norway’s unrivaled FINN, followed by New Zealand’s less dominant Trade Me. Alongside the U.K. and France, Germany exemplifies a larger and less unified market with a generalist leader (Kleinanzeigen) and strong vertical players (ImmobilienScout24 and Immowelt/Immonet in Real Estate, Mobile and AutoScout24 in Autos, StepStone in Jobs). In markets without dominant players, multiple unremarkable competitors fill the void.

Leading classifieds enjoy high profitability and lasting monetization through pricing power and product upsell. In fact, a pronounced relationship exists between a classified’s market position and monetization rate (revenue per Internet capita, adjusted for the countries’ disparity in personal disposable income) – FINN (€37) and Trade Me (27) are the world’s leaders, while internal competition puts Germany (23), U.K. (17) and France (15) behind.

Notes: (1) Australia’s REA Group is an outlier in monetization as, due to the market’s unique features, it charges listing fees of up to 1% (and at times more) of a property’s selling value directly to the seller; eBay’s large revenue in Australia and the U.K. is not part of the calculation as its business includes B2C sellers and is closer to Amazon rather than a C2C generalist classified; (2) Adevinta’s Leboncoin in France and Mobile in Germany are arguably undermonetized; (3) adjusted revenue per Internet capita is calculated as a classified’s total revenue in 2023 divided by the respective country’s population and adjusted for the differences in disposable income per capita across the countries (the Baltics = 1.00x).  Source: company reports and Capital Markets Days, World Bank for population, OECD for real disposable income per capita, our analysis for market structure.

Uniquely dominant across its small markets but early in monetization relative to peers is Baltic Classifieds Group.

OVERVIEW OF BALTIC CLASSIFIEDS GROUP

Founded in 1999 and headquartered in Vilnius, Baltic Classifieds Group (“BCG” or the “Company”) organically and through acquisitions developed into an unrivaled player in Lithuania and Estonia (while the privately owned portal SS is the #1 in Latvia) with $78 in LTM revenue (2/3 from Autos and Real Estate, 1/3 from Jobs and Generalist; 5-year CAGR of 20%). BCG has an industry-leading EBITDA margin of 77% (87% EBITDA-to-cash conversion given a low tax rate and minimal interest and D&A charges), aided its market position and lean operating culture. CEO Justinas Šimkus and COO Simonas Orkinas have been with the Company for nearly 20 years, and the average tenure for employees and executives is 8 and 14 years, respectively. 

BCG's business segments (only its major classified assets are included)

BCG's competitive position in Lithuania and Estonia

Notes: (1) Lithuania’s Services classified portal Paslaugos accounts for the C2C part of the Jobs & Services segment; (2) C2C listing price is per month, while it takes several months to sell a property or a car; (3) “Traffic” is defined as total monthly visits, “Engagement” as total monthly time on site  Source: Similarweb as of August 2024.

In market dominance, BCG’s only equal is FINN. In value proposition to buyers and sellers (as measured by portal traffic and visitor engagement), BCG surpasses both FINN and Trade Me, and is also visibly ahead of most Real Estate, Auto and Jobs peers. Furthermore, the share of highly profitable C2C listings in BCG’s revenue is 30-40% compared to peers’ 5-10%. BCG in part owes these standout characteristics to the fact the Baltic countries’ young market economies developed alongside the Internet and are highly digitized and less intermediated as a result.

BCG¹ has industry-leading Visitors² (monthly visitors per country’s Internet capita):

BCG also has industry-leading Visitor Engagement (minutes spent per month per country’s Internet capita)

Notes: (1) “BCG” is defined as a sum of its generalist and vertical classifieds in Lithuania and Estonia; (2) visitor data for desktop only and may overstate BCG’s advantage as large mature portals derive up to 1/3 of their traffic from mobile apps.  Source: Similarweb as of August 2024.

A part of larger companies until 2019, BCG only began unlocking its full potential as a standalone entity under Apax Partners. Its revenue per Internet capita is still €18, as both professional subscription and C2C listing costs are low relative to peers.

BCG’s equity trades on the London Stock Exchange since 2021.

LONG THESIS

We believe that BCG (1) will narrow the monetization gap with peers, (2) could expand its regional presence into Latvia and (3) is an attractive target for a private equity buyer.

1. BCG will narrow the monetization gap with (a) FINN and Trade Me and (b) vertical peers

(a) BCG’s low monetization rate relative to the closest peers FINN and Trade Me is in stark contrast to its dominant market position and strong customer engagement. While BCG has been improving monetization, we expect further progress to drive an annual revenue growth rate of 17-20%, and revenue to nearly double between the calendar years of 2024 and 2028. Implicitly, at €38 in revenue per Internet capita in 2028, BCG will only narrow the gap with FINN and Trade Me – who themselves keep growing – to 0.6x their level from 0.5x today and 0.4x in 2018.

Note: (1) calculated as a classified’s total revenue in each year divided by the respective country’s population in the year and adjusted for the differences in disposable income per capita across the countries (the Baltics = 1.00x, Norway and New Zealand with similar disposable income per capita = 1.45x).  Source: company reports, World Bank for population and Internet penetration, OECD for real disposable income per capita (and our estimates for the years in which OECD’s data is missing), our projections for the growth of BCG and peers (assumed at 10% per year).

(b) We expect BCG’s 17-20% annual growth rate to come from mid-teen price adjustments – which embed a higher “take rate” but also reflect listed items’ value inflation, a tailwind for BCG due to improving living standards in the Baltics – aided by minor increases in listing volumes. Although BCG ties price increases to product upgrades, we foresee no outsized investments and thus sustained profitability. We anticipate price adjustments across all segments but are particularly encouraged by the upside potential in the Real Estate and Auto verticals (2/3 of BCG’s revenue).

In Real Estate, we note a pronounced gap relative to mature peers. At €2,000 per year, BCG’s subscription cost is 2.6% of an agent’s annual commission pool compared to 4-5% at Scout24 and Rightmove, the subscription-focused European portals. Furthermore, at €23, BCG’s C2C listing costs only 0.04% of the average property selling value compared to 0.2%-0.4% at Hemnet and REA Group, the Swedish and Australian listings-driven peers

Notes: (1) the bulk of agents’ commissions are from sales transactions, and we used only budgets from property sales across the countries for consistency; (2) assuming it takes three months to sell a property.  Source: company reports and Capital Markets Days, official statistics, industry sources and our estimates; Similarweb as of August 2024 for website traffic.

After the aforementioned pricing gaps are narrowed (beyond our forecasting period), we believe Aruodas and KV may follow the path of mature peers and support revenue growth through new product introduction (new products account for ~50% of incremental growth at Rightmove and REA Group and the majority of incremental growth at Scout24):

Comparable gaps also exist in the Auto vertical. At €3,100, BCG’s subscription cost is 2.5% of a local dealer’s annual commission pool compared to 6-8% at Mobile and Autotrader in Europe and Carsales in Australia. At €20, a C2C listing costs 0.16% of a car’s selling value, below the C2C-heavy peer Carsales’s 0.2%-0.5%. Looked at differently, the cost of selling a car through BCG currently is not far from that of a carwash.

Note: (1) the bulk of dealers’ commissions are from used vehicle sales, and we used only budgets from used vehicles across the countries for consistency. Source: company reports and Capital Markets Days, official statistics, industry sources and our estimates; Similarweb as of August 2024 for website traffic.

Here, we also note Autoplius and Auto24’s potential for growth through new product introduction (new products account for ~50% of incremental growth at mature Autotrader and Mobile and possibly a larger share at Carsales):

Of particular interest within BCG’s other segments is Services (Paslaugos.lt), a growth contributor (1% of total revenue in 2020 but 4% in 2024) that over time could develop into a large vertical itself.

2. BCG could undertake a value-accretive expansion into Latvia

We view BCG as the ultimate natural owner of the Latvian peer SS which arguably has a significant upside in monetization (currently under €10 per Latvia’s Internet capita) under a focused industry operator. The Company’s strong balance sheet and cash flow (currently utilized for buybacks and dividends) could facilitate this acquisition.

3. BCG itself is an attractive target for a private equity buyer

Online classifieds have attracted numerous private equity buyers over the years, and BCG may (again) be acquired by a private equity firm. In fact, given its unique business quality and barring a geopolitical escalation in the region, we do not expect BCG to permanently remain a public company.

Acquisitions of classified operators by private equity firms

Source: Pitchbook, our own analysis based on public sources

VALUATION

Within the scarce listed European peers, slower-growing Scout24, Rightmove and Autotrader have over time traded at 14-19x NTM EV/EBITDA, and the fastest-growing Hemnet at over 30x. While BCG’s current multiple of 22x appears reasonable in that context, due to the aforementioned high EBITDA conversion, the corresponding P/E multiple of 26x and 3.8% cash flow yield are only in line with the slower peers and therefore arguably conservative.

We therefore extend the multiple of 22x (as we see no demise of BCG’ strong growth) to the calendar 2028 EBITDA of €122 mn for the 2027 share price target of ₤5.3, an 87% upside from today’s price. Our bull (faster growth, higher multiple) and bear (the opposite) scenarios provide for price targets of ₤7.9 and ₤2.4, respectively.

Multiples of listed European peers

Notes: (1) Australian peers tend to trade at significantly higher multiples and are therefore not included; (2) Rightmove’s valuation quoted as before 9/2/2024 (i.e. unaffected by REA’s reported strategic interest).  Source: Bloomberg as of September 10, 2024, our own projections for BCG

RISKS

1. Execution by BCG

To sustain its high revenue growth rate and profitability, BCG needs to execute across multiple business segments in at least two countries. We take comfort in BCG’s strong track record, asset quality and favorable market position.

2. Geopolitics and the exchange of listing

BCG’s region could undergo a geopolitical escalation, which is a risk without a convincing mitigant. Furthermore, the LSE listing and biannual reporting also could limit the Company’s valuation upside and investor appeal.

Catalyst

No clear-cut catalyst currently exists, but as a 2021 IPO, the Company is relatively new to and undiscovered in the public markets. Additionally, Apax Partners exited their investment in BCG in July, which removed an overhang.