Embed Size (px)
Citation preview
Introduction Because they wouldn’t let me pitch Zedge.
• Vostok New Ventures (VNV) is an investment holding company based in Sweden and listed on the Stockholm Stock Exchange.
• VNV has a net asset value of $880M, consisting of a 13.2% stake in the Russian classifieds website Avito (62.2% of NAV), as well as other emerging markets companies (31.6% of NAV) and cash.
• VNV is the best way to invest in Avito. Avito dominates the Russian classifieds market, and is in early stages of monetizing. Avito can easily grow earnings at 20%+ for the next decade.
• Because of limited visibility into Avito’s financials and VNV’s NAV discount, Avito is available at just 23.8x 2018E earnings.
• The result: VNV has an expected 10-year IRR of 20%.
Dylan Adelman [email protected]
2
Craigslist Can you spot the difference?
Dylan Adelman [email protected]
3
Craigslist in April 2000
?
Craigslist Can you spot the difference?
Dylan Adelman [email protected]
4
Craigslist in April 2000 Craigslist in April 2018
“Every few years, someone in Silicon Valley looks at Craigslist and thinks he or she can do
better. All these efforts basically come to naught […] Craigslist pulls in more than $500 million in profit a year without trying.” - Forbes, May 2017
Classifieds The opposite of Bruce Greenwald’s toaster.
Dylan Adelman [email protected]
6
What makes online classifieds such a great business model?
The network effect among buyers and sellers gives a large advantage to the first mover and ensures that the market is winner-take-all.
1
2
4
3
5
6
Online classifieds are one of the best business models in the world.
The combination of an unregulated natural monopoly and myriad pricing levers results in substantial pricing power over time.
Minimal capex requirements at scale because acquiring new users and raising prices is not contingent on reinvestment rates. The result is a near-100% dividend payout once mature.
Recession-resistant business model that meets the basic need for location-based buying and selling by both individuals and businesses.
Asset-light business model because no assets are required to deliver the services and there is no inventory. Ultra-high return on assets.
Professional sellers create subscription-like recurring revenues via value-added services.
Avito vs. #2 Competitor in Russia (Page Views)
Avito The best combo of Russia and Classifieds since Trump Tower.
• Founded in 2007, Avito is the third-largest classifieds site in the world after Craigslist and 58.com (China). Avito has 70%+ market share in all verticals, and is arguably the most dominant classifieds website in the world.
• Avito is highly under-monetized. Per-user revenue is by far the lowest for any major classifieds market, as Avito did not begin monetizing listings until 2012 (versus early 2000s for international peers). Most revenue comes from listing fees and value-added services in a few verticals like jobs and autos.
• In 2017, Avito earned revenue of $269M (32% increase) with an operating
margin of 53%. Unique sellers increased by 9% to 47M (⅓ of all Russians).
• Avito’s earnings are a factor of Per-User Revenue × Users × Margins. Sustained increases in each of these will drive up Avito’s valuation.
Dylan Adelman [email protected]
8
General: 70.1x
Services: 71.1x
Real Estate: 21.6x
Autos: 2.2x
How will Avito grow Per-User Revenue × Users × Margins over time?
Classifieds Revenue/Capita by Country (PPP-Adjusted USD)
Per-User Revenue Even Craigslist is better monetized than this.
• Because Avito was not founded until 2007, it is far earlier in the monetization curve than international peers. Avito’s current monetization roughly matches peer levels in 2008.
• Determining revenue/capita potential is difficult because most peer sites control specific verticals. Very few are the dominant classifieds site across every vertical like Avito. In this sense, Avito is comparable to nationwide aggregates.
• Peer comparisons adjust for income levels because most
comparables are in higher-income countries than Russia.
Dylan Adelman [email protected]
9
15.9
15.2
12.1
8.7
1.9
6.3
How can Avito reach the per-user revenue of more mature classifieds markets?
“The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business.” – Warren Buffett
Per-User Revenue Monetizing like Mugabe.
Avito has an enormous runway for monetization:
Dylan Adelman [email protected]
11
1
2
4
3
5
Categories/Regions with listing fees
Categories/Regions without listing fees
[Data from October 2015]
Roll out listing fees to more categories and regions. Fewer than 5% of categories have listing fees.
Increase prices. What alternative do sellers have?
Sell professional value-added services (VAS) to businesses that list multiple products on Avito.
Further monetize verticals. Avito’s dominant real estate subsidiary, Domofond, earns zero revenue.
Increased third-party advertising, such as the partnership with Yandex announced in March.
Avito did not begin monetizing select verticals until 2012, and is 10 years behind its peers on the monetization curve. Over the next decade, Avito will converge with peers’ 2017 per-user revenue.
Avito Revenue/Capita (USD) 2017 à 2027E
Per-User Revenue Pricing power like Valeant, but without the congressional hearings.
• France has the lowest PPP-adjusted revenue/capita classifieds services among larger developed countries (after Russia). Using France in 2017 as a benchmark for the revenue/capita that Avito can earn in a decade, Avito will achieve at least 4.9% annual per-user revenue growth.
• This does not include GDP growth, which affects the number of items sold per user (quantity, not price). Based on OECD projections for the next decade, Russian GDP growth will be a 2.6% annual tailwind.
• Growth will remain strong in a decade. In 2017, France’s classifieds
site, Leboncoin, achieved 20% revenue growth with 58% margins, and is guiding for 15-20% long-term growth. If peers that are more than a decade further into monetization can still grow revenue at 20% per year, then estimating 7.5% for Avito is highly conservative.
Dylan Adelman [email protected]
12
1.9
6.3
2018 is just the start. Per-user revenue growth will be at least a 7.5% annual tailwind.
User Growth How is 10% of the US population still not connected to the internet?
Dylan Adelman [email protected]
13
• One proxy is site visits over time. According to SimilarWeb, site visits increased by 9% in 2017.
• Increased internet penetration is also a driver of new buyers. Only 70% of Russians are internet users, versus 90% in the US/EU. New internet users in Russia will be a 2-3% annual tailwind.
• Russia’s online spending will grow at 18% annually over the next five years (Russian Association of Communication Agencies).
Buyers Sellers
• One proxy is listings over time. VNV reported that Avito’s listings increased by 18% in 2017.
• Avito’s total number of unique sellers (“listers”) increased by 9% to 47M (that is 1 in 3 Russians).
• As a proxy of professional sellers’ advertising budgets, PwC estimates that Russian online ad spending will grow at 21% through 2021.
• As of March 2018, Yandex (the Russian version of Google) is now directing advertisers to Avito.
While precision is difficult, user growth will be at least a 6.0% annual tailwind.
Margin Growth Is the business quality of online classifieds apparent yet?
• Classifieds businesses naturally expand margins as they mature due to lower spending on R&D and marketing, as well as market consolidation.
• The highest-margin classifieds are those that are either in control of a massive market (Craigslist in the US) or in control of a highly monetizable vertical (Rightmove with UK real estate).
• Avito controls a market size similar to Craigslist with multiple verticals similar to Rightmove.
Dylan Adelman [email protected]
14
90.0%
Peer EBITDA Margins (2016)
60.3%
52.9%
56.5%
45.0%
42.2%
76.4%
64.2%
How can Avito achieve this margin expansion?
“We believe that Avito will be able to reach best in class margins of at least 70%.” – VNV, 12/2017
Margin Growth An undisclosed subsidiary?
Dylan Adelman [email protected]
15
“Domofond is still in a development phase and does not generate any significant revenues.” – VNV, 12/2017
Domofond is a separate entity, so it must file an annual report with the Swedish government.
VNV’s Ownership Structure Avito’s Subsidiaries
Acquiring Avito’s financials from the Swedish Companies Registration Office (Bolagsverket) is difficult, and even these do not fully break out Domofond. But, they reveal that Domofond is a separate legal entity.
Domofond is likely to be weighing down Avito’s margins, but VNV does not break out its impact.
Margin Growth At least it’s not Chewco or Philidor.
Domofond offers Avito a clear path for margin expansion: • Because Domofond is still in the investment stage, it creates
53% of Avito’s product development costs, but no revenues.
• Domofond produces 11% of Avito’s total expenses. Without these temporary costs, Avito’s margins would be 5.9% higher.1
• As Domofond matures and begins to monetize, its margins will improve and will eventually match (if not exceed) Avito overall. This is not too aspirational for a real estate vertical.
• Once Domofond begins to follow Avito’s vertical playbook on monetization, the new revenues and margin improvement will drive Avito’s overall margins to 70% without any other changes.
Dylan Adelman [email protected]
16
[ – break – ]
[Domofond financials in SEK thousands | Avito financials in RUB millions]
1112M SEK = 879B RUB à 879/14968 = 5.9% increase in margins
Domofond
Avito
Margin Growth More margin expansion than a sell-side report on Tesla.
Avito will approach 74% operating margins by 2027. Margin expansion will be a 4.6% annual tailwind.
Dylan Adelman [email protected]
17
47%
13%
11%
19%
10%
74%
9% 4% 6% 7%
2017 2027E
COGS
S&M
R&D
G&A
Operating Income
A few key drivers of margin expansion for Avito: • Decreased sales and marketing (S&M) spending as
Avito’s usage further increases among professional sellers, and as competitors (i.e. Yandex) capitulate.
• Domofond’s transition out of the investment stage
will lower product development (R&D) expenses.
• Lower G&A as a percentage of sales because back office expenses like labor will increase at a slower pace once Avito becomes more mature.
NAV Discount Somewhere between Murmansk Trawler Fleet and PSH.
Despite its growth prospects, Avito is remarkably cheap when purchased through VNV:
• With a $740M market cap and $880M NAV, VNV trades at a 16% discount to reported NAV. This is the largest discount to NAV in the last decade. VNV historically trades in line or above NAV, and the discount is the result of a recent adjustment in the carrying value of Avito (+32% in December 2017).
• After netting out other investments ($300M), VNV’s 13.2% stake in Avito is priced at $440M. This implies an overall price for Avito of $3.33B. Avito’s 2018E earning are ~$140M.
• Through VNV, Avito is available at only 23.8x 2018E earnings (4.2% yield).
Dylan Adelman [email protected]
18
VNV Price/Share (Line)
VNV NAV/Share (Bar)
10-Year IRR It can’t be worse than shorting PayPal, right?
Dylan Adelman [email protected]
19
Revenue/User GDP Growth New Users Margin Growth Earnings Yield
+ 2.6% 6.0% 4.6% 4.2% 4.9% + + +
Avito
= 22.3%
88%
Other Investments
Avito
12%
10-Year Average Weight
IRR
22.3%
0%
×
× = 10-Year IRR = ~20%
Given that “other investments” have double digit returns and VNV is reasonably skilled at capital
allocation (proof: Avito), this is an extreme lowball.
Vostok New Ventures will earn a 20% average annual return over the next decade.
This assumes zero multiple expansion
Rightmove A useful parallel for Avito in 2018.
• Rightmove is a UK real estate classifieds site, founded in 2000. After almost a decade of rapid growth, Rightmove appeared to slow down by late 2007.
• Over the next decade, investors earned 28% per year (on average), including dividends. This was from a base price that was not reached again until 2010.
Dylan Adelman [email protected]
20
12/2017 £44.89
“The analogy with Rightmove in 2007 […] still holds very well. Rightmove tripled revenues during the 10 years following 2007 whilst maintaining world class margins. We believe Avito is on the same route, possibly even at a faster rate.” – VNV, 12/2017
28% 10-year IRR
• Rightmove is still posting impressively strong numbers: • 14% EPS growth in 2017 with a 30% payout • 85% of EPS growth from monetization • Trading at 25.5x 2018E earnings
12/2007 £4.40
“No formula in finance tells you that the moat is 28 feet wide and 16 feet deep. That’s what drives the academics crazy. They can compute standard deviations and betas, but they can’t understand
moats.” – Warren Buffett
Special Thanks The Sohn Conference Foundation
Global Platinum Securities Matt Jackson
