Consensus community valuation
Having watched an initial small position in FDV become a tiny position due to the troubles with Zameen and general market re-rate over the last couple of years, it’s time to decide to commit or capitulate.
Business Profile:
Frontier actively invests in and moves to controlling stakes in housing and car market platforms in developing countries in Latin America, Asia and North Africa. CEO founder Shaun Di Gregorio sold iProperty to REA and runs Frontier (9% own), which starts with a non-controlling position and increases as it sees potential and is able to assist in the establishment of the platform as a market leader.
All current platforms are leaders in their markets, but the markets are developing economies with currency, political and economic risks beyond developed markets, but are currently about 10-15 years behind in the industry. As such the chance to become the dominate player in a winner takes all market is up for grabs. In addition, due to the nature of the markets and lack of trust between seller and buyer due to poor institutional and legal controls, there is the additional opportunity to clip the ticket to facilitate the transaction, not just to act as a marketing portal.
FY23 Update:
Frontier has just had its first full year of positive cash flows, and EBITDA is up from $5.7 to 7.8m but revenue is down 5% due to Zameen (Pakistan) which also had reduced EBITDA contribution. Recurring subscription revenues have increased significantly to absorb falling Advertising and Media revenue which indicates underlying growth of the platform but short-term market weakness.
EBITDA% increased from 8% to 10% Vs FY23. A 48% drop in EBITDA contribution from Zameen was picked up by 360 LATAM increasing 61%. Note that Q4 saw Zameen’s EBITDA% increase from 3% to 16% QoQ on a negligible change in sales (cost management?)
Investment Thesis:
Frontier operates in high-risk markets with high returns potentials, but the diversity of the markets and now being cash flow positive mitigates a lot of the risk (Ergodic). An above market return is justified if just one of the markets takes off and becomes even 10% as successful as REA.
Frontier currently controls or part owns the leader in each of it’s markets, with challenging economic conditions of the last few years leading to the a large cull of other minor players. Pakistan retuning to stability post-election and continued growth with 360 LATAM provide the greatest opportunity but MENA Marketplace Group and FDV Asia sit at 20% of Sales and 25% of EBITDA contribution currently are also strong contenders for long term value.
Need to see Frontier maintain it’s market leading position and preferably show progress on sales and EBITDA growth in aggregate. Will expect significant volatility in results across the markets but provided the group can continue to grow FCF then the investment is on track to perform.
Value:
The variability of outcomes is extreme so I am looking more at what the current price assumes and seeing if that is favorably asymmetric.
High Discount rate: 15% (Mkt perception) multiple parts, early stage and markets it operates in.
Sales growth slower than company target of US$100m by FY25, I assume FY27.
EBITDA% rises to 21%, which is reasonable given Zameen was doing 18% in FY22.
Valuation average = $0.43 on above assumptions
· DCF = $0.35 discounted from FY28 @15%
· PE 15= $0.49 discounted from FY28 @15%
· P/EBITDA 12 = $0.45 discounted from FY28 @15%
Other Issues:
· Strong possibility of additional capital raises to fund new purchases or increase stakes in existing purchases.
· FDV markets may have a population 34x Australia but the GDP of those markets is only 3x and with unstable currencies and governments in many.
· FX movements will swing results considerably – FY23 a 26% FX move in Pakistan on 14% of the business impacted the result materially.
Decision:
This remains a speculative position, but one I intend on returning to a small position and commit. I don’t see a rush to buy, the price is still struggling under seller pressure so I will ease my way back into a reasonably sized position. The market is yet to be convinced that FDV is pivoting into profitability and cash generating – the price won’t be at this level once we know for sure!
Disc: Own IRL
The Good
- 9% QoQ increase in total revenue to $21m - $58.4m YTD.
- 35% QoQ increase in EBITDA to $2.3m - $5.7m YTD
- Positive operating cash flow of $890k and free cash flow of $272k which led to a marginal improvement in cash position to $15.4m. Third consecutive quarter of positive operating cash flow.
- Operating expenses continue to remain flat
- General improvements shown across most of the groups business’s
The Not So Good
- Reported web metrics are flat over the previous quarter which may be a bit of a leading indicator for growth in the operating regions. These have only been reported over the last two quarters so it may be a little early to draw any inferences from these metrics
- Zameen revenues improved slightly, however EBITDA was down QoQ. (This result was impacted by currency appreciation)
- Yappo (LATAM) and PropertyPro (MENA) also had ongoing EBITDA declines over the quarter.
Watch Status
What To Watch
- Q4 will require 14% total top line growth to match FY22 revenue which will
- Improving operating margins mean that EBITDA is currently on track to exceed FY22 and deliver positive operating cash flow for the year.
- Roll out of Iris into wider LATAM markets expected to generate new revenues. This will show up in the “Other” revnue category in future reports.
- Avito has become the strongest performing brand by EBITDA. One off?
The Good
- New branding for 360 LATAM and MENA Marketplaces indicate long term business building strategy by separating from the FDV name.
- The split of revenue type for each group was reported this quarter. If this metric is carried forward it will make tracking management’s focus on increasing transaction revenues easier.
- Although total revenue for Q2 was down YoY, overall EBITDA had improved which demonstrates that the focus on cost control is showing.
- $15m in cash remaining at the end of the quarter after earn out payments have been completed. Q2 was marginally operating cashflow positive for the second consecutive quarter, so this balance should be enough to fund the next stages of growth.
The Not So Good
- Zameen continues to struggle with revenues falling 32% QoQ from $3.65m to $2.45m and 64% YoY from $6.81m in Q2FY22. Management have indicated that revenues had started to show signs of improvement. Some of the improvement has been masked by the improving rupee.
- Total group revenue for the quarter of $19.2m, which is an improvement on Q1’s $18.2m but when annualised out to $76.5m is still down on FY22’s revenue of $82.3m. This shows how significant Zameen previously was to the business even with as the rest of the business’s continue to improve.
- While the operating groups are improving, the rate has been fairly slow compared to the targets indicated by management for LATAM. Also, most of the growth in the 360 LATAM group comes from changes in exchange rates. The only business with noticeable YoY growth was Encuentra24.
- This quarter's update is quite promotional compared to previous updates dedicating a slide on comparing the current share price to the IPO price. While share price ultimately matters as a holder, I’d rather the quarterlies focus on the business.
Watch Status: Cautious
What To Watch
- Improvement in Zameen revenues from May to June was flagged by management. With the macro situation improving this improvement should continue.
- Fincaraiz B2C revenue stream expected to contribute to growth in coming periods (Carried over from the previous quarter - No significant change this period)
- Continued growth in transaction revenue. This currently makes up ~26% of total revenue.. (Carried over from the previous quarter. Note this can now be tracked if the revenue splits reported this quarter remain)
The 4C is out for the quarter.
Notes to self the following:
Zameen has been impacted by the national instability. House selling is down ~50%, however car buy/sell PakWheels was steady, even a little up. I guess people have FUD in Pakistan like they do here and won't move on large sales, but will on smaller ones when experiencing FUD.
Interestingly, iMyanmarHouse bounced back >100%, which shows how quickly these types of businesses bounce back once the instability settles down. I am expecting the same once Pakistan calms the farm.
I remain skeptical of the "maiden quarter of cash-flow positivity". In this CF+ environment, you'd be crazy to work up the accounting tricky and FX voodoo to conjure up CF+ results. But at the same time, it fits with the narrative that Shaun has always told.
Finally, the cap raise was mentioned; the institutional placement for $13Mil was successful. I haven't participated in the SPP and wasn't going to. I was going to accept the dilution, but with the price of shares now around the price I first bought in at...well this little red dog is going to live on instant noodles for a week and buy a small top up parcel on market for $0 brokerage.
^ screen grab from the 4C.
@Bushmanpat, I've titled this straw bear case as their are some near term risks that you might want to consider.
Overall I think what you have done is a good go at getting a ballpark idea of where FDV could be in a few years if they keep executing in LATAM. I don't think the 5 years to get to $100M is that agressive and I will be disapointed if they dont achieve this sooner. If we look at how quickly the revenue of Zameen has grown over the last 5 years from $22M in 2018 to $82M in 2022, with this period including a flat covid 2020, so a pretty difficult 5 year period. LATAM is currently doing revenue of $45M, they have a good management structure in place and now and are capturing the transaction revenue so I think this trajectory should accelerate if it is working well.
Now for the bear bit -- There are a few near term issues that I am not sure how they are going to be resolved.
-The big one that is in the price, is a default by Pakistan. It looks like they will get a IMF bailout, but this is me just reading the tea leaves as I would have expected them to fall by now if they were going to, but this is still a binary risk.
-They also have some contingency payments that fall due in May this year related to the purchase of the LATAM buisnesses - US$17M for Infocasas and US$9.7M for Encuentra24. They did do a deal last year when they did the regional restructure with the previous owners now the managers of the region. As part of this they swapped some of their earnout into FDV equity - minimium 50% for Infocasas and 25% for Encuentra24. They can also elect to take it all in FDV equity if they want to but if we assume they will take the minimum then FDV needs to come up with around $US16M. I'm not sure where they are going to get this from as they are still a ways off getting positive cashflow to cover this, they had cash of AUD$27M last quarter but this would leave them very thin if they use it all. Some options are a cap raise, would be bad timing given the SP. They might be able to offload some or all Zameen to the majority holder as part of a pre-IPO share registry cleanup. Alternatively they may negotiate a payment deferal. This is all speculation though as they haven't mentioned anything, but I expect that the details will be in the March quarterly.
Anyway @Bushmanpat this is a longwinded way of saying that, like you I am comfortable about the long term growth potential of FDV and LATAM in particular. I also think that they will get MENA improving as well. I do see this being a dynamic and bumpy ride though and I don't have high confidence in assessing what it is worth today beyond thinking that it is broadly undervalued if they execute the way I think they will. My approach with FDV is to keep following the quarterlies and as long as they keep executing against their strategy and the indivudal buisnesses are impriving then I am happy to back management and hold on.
I'm pretty happy with the progress FDV have made in 2022 in both revenue ($82m) and EBITDA momentum.
FDV LATAM is the clear standout and the consolidation of this area and new management team seems to be having a good outcome. Revenue up 48% to $45m. EBIDTA of $2.1m up from $1.1 in 2021. InfoCasas and Encuentra are the main drivers of this and are following the same trend of Zameen just a few years behind. Fincaraiz and Yapo were more stationary but commentary suggests these have been improving from the start to the end of the year and and should be better in fy23.
FDV asia was a solid contributer, mainly centred on Zameen but many of the others showed good revenue growth rates if off small bases. AUD conversion rates are reducing the benefits from this region.
FDV MENA smallest contributor in terms of revenue ($8.5m) and still lagging the other regions with negative EBIDTA of $0.8m, but generally moving in the right direction and had positive cashflow in the 4th quarter.
Cash burn of $1.8m for the quarter but still have $26.9m of cash available.
It looks like they have 3 clear winners now - Zameen, InfoCasas and Encuentra and several maybes. It is a pretty good strikerate and happy to keep backing Shaun.
To me FDV is a bet on the strong management of Shaun Di Gregorio and team. I think he is a very quality operator and I like the way they tell investors what they are doing, and why and then importantly deliver on their milestones. To me this is a 2-5 year minimum story but I am confident that FDV will be a bigger and better business into the future. This company has the perception of risky as it operates in developing countries but I think the way they have their buisness risk spread across the globe and the quality of management makes me consider this to be one of my lowest risk holdings and expect this will have a share price of more than $2.50 when all buisnesses are operating in positive EBITDA.
A copy of the analyst call is available from the FDV website and is worth a listen. Shaun does a very good job of explaining what they are doing - below are my takeouts.
New geographical structuring of the business segments into three defined regions.
-Latin America (Colombia, Bolivia, Chile, Paraguay- 4 businesses)
-1.1m + EBITDA
-Asia (Pakistan, phillippens, Myanmar, Sri lanka- 7 businesses)
-2.8m EBITDA (5/7 companies + EDITDA)
-Majority ownership of Hoppler (51%)
-MENA (middle east, North Africa + west Africa- 4 businesses)
-2.0m EBITDA loss
-Transformation on track, bought AVITO in full just over a year ago – 4th quarter only 0.2m EDITDA loss vs 2.0m a year ago.
Target the uncrowded market regions (have avoided China, India, Mexico etc) and aim to buy/develop best in region marketplaces
Revenue of 60.2M à next milestone target of 100M/yr, exit runrate is currently 78M
- Used Covid to increase the quality of overall portfolio, growing at rapid rate. FY22 aim for breakeven across the group and maintain and increase positive EBITDA over the next 12-24 months.
- Strong balance sheet (>54m) and no requirement to raise any more capital. Last raise in December (53.9m @ $1.50 - Good timing and they have a history of raising necessary capital when share prices are high).
- Thinks they are in a sweet spot coming into 2022, revenue performing well, intact strategy to grow each business.
Transition to a transaction focused marketplaces from a more traditional market classified business on track and accelerating – gives them the opportunity to collect more of the total value of the transaction and facilitate required services (e.g home loans, pre-purchase inspections etc) and collect a fee.
They think about transaction revenue as the opportunity to fully facilitate the transaction in house within their platforms. To be successful the business needs to be market leaders and have the trust reputation àstrong brands + strong marketplaces = ability to improve the experience for the buyer and seller which facilitate transactions. Using technology to facilitate high quality matching to produce quality leads. Keeping the consumer in your environment and making them feel safe using you to process the transaction. Targeting 10-15% of transactions to be captured by the business will generate 15-20 times the revenue of the traditional classifieds buisness that gets revenue form only advertising.
Economics of the transaction business gets better over time à is expensive and time consuming to start up from scratch. Much easier to facilitate transactions when you a captive audience of sellers which is why they target and develop good market leading classifieds business and then transition to transactions.
Zameen (30% owned by FDV) continues to perform very well – 60m revenue à 51m is generated from transaction revenue. Commentary on Zameen is that they consider this will be a billion dollar standalone business in time.
Lot of excitement about Infocasis (owned for just over 12 months) and its successful transition to transactional revenue – Facilitated 1400 property sales in 2021 vs 185 in 2020. They consider Infocasis has cracked the code on how to do transactional revenue and they are moving this technology and know-how to the other businesses within the Latin America group.
Talked about how the transaction revenue is still cutting edge and many other groups haven’t done it well but they are confident of how it is unfolding in Latin America. Transaction revenue is still a bit earlier in the Asian business. Commentary was this this has gone from nothing to something really quickly and they expect this trend will continue over the next 24 months.
FDV released their full year results this week. Practically no change from the 4th quarter results - FDV continues to exceed expectations and execute its plan successfully.
What was interesting is a couple of slides that visually show how they start with classifieds and end up with more of the transaction pie slice, that is more of the exchange happens on the site. THe trick is the size and trust of the site, so that users continue to pay for a service and don't flee to the next startup that is 'free'.
A carsite.com example. carsite.com connects a buyer and seller, but these persons exchange their money separately to the carsite.com website. carsite.com makes money from ads on site, and a fee charged to the seller. If carsite.com provided a 'click here to check car rego for $x' and 'click here to pay via carsite.com payment portal etc', then more ticket clipping occurs for carsite.com.
