Mitula — Update 13 February 2017

Since our last update in August 2016, Mitula has continued to make considerable operational progress against its strategy to increase its market share both organically and through acquisitions while working to increase the yield on its traffic. We summarise key developments below:

Adding markets. Over the second half of 2016, a further six new sites have been launched in three new countries (Japan, Ukraine and Myanmar), taking the total to 79 sites across 51 markets.

Widening its reach. Mitula has continued to develop its sales initiatives. It has added to its direct sales team (also bolstered following the Dot Property acquisition), which is targeting large employers, developers and auto manufacturers in select Tier 1 markets (defined as Mitula’s established markets where traffic is primarily monetised via cost per click (CPC), such as the UK, Australia, UAE, Germany and France). In addition, in Q3 it launched a self-service offering to enable click packages to be bought directly, widening its reach to smaller portals where it is not cost effective to engage the sales team directly.

Mobile apps. Compared to other classified media groups, Mitula’s mobile traffic (accounting for only 0.5% of its total monthly visits in January 2016) is under represented. Since IPO, Mitula has rolled out 108 mobile apps in the real estate and employment verticals across iOS and Android.

Launched in the fashion vertical. The Mitula and Nestoria brands are used in property (both brands), cars (Mitula only) and employment (Mitula only). Management believes there is an opportunity to aggregate the highly fragmented fashion segment, which is gaining momentum in Tier 1 markets. In September, it launched its first fashion vertical in Spain under the Mitula brand, with 50 online stores linked to the site (c 3,800 listings), which itself is linked to the other Mitula sites in Spain (c 3.8 million visits per month). Unlike the CPC model of monetisation used in Mitula’s other three verticals, the fashion industry follows a cost per acquisition model, with most stores sharing a percentage of revenues generated in the first 30 days from visitors directed to their site from Mitula.

Acquisitions. In March Mitula acquired Barcelona-based real estate classified vertical search operator Nuroa (for €3m, A$4.5m, c 9x FY16e EBITDA), adding to its market position across 17 markets in the US, South America and Australia. In September, it purchased Dot Property for A$11m (of which 60% to be paid in shares over three years). This acquisition is significant not only for its larger size, but also because it marks Mitula’s first move ‘upstream’ in its Tier 2 markets (defined as emerging markets with high levels of traffic but low levels of monetisation, such as Mexico, the Philippines, Colombia, Brazil, and Indonesia), an integral part of its efforts to increase its yields in these markets. Dot Property is a South-East Asian property portal network operating 10 portals across nine South-East Asian markets (generating 123 million visitors in Q216 and 2.7m page views in August 2016. Its revenues for the 12 months to June 2016 increased 123% to A$1.7m and growth has continued to be strong; Mitula reports an annualised revenue run rate of A$2.6m in August, putting the company on track to be EBITDA break even in December 2016.

In addition to boosting its South-East Asian presence, the acquisition should deliver a number of strategic benefits. Portals charge advertisers for listings on their sites. This is typically higher yielding than the aggregation model, which is based on CPC (Dot Property yields are several times higher than Mitula’s average in T2 markets). By leveraging the traffic to Mitula, management believes it can drive Dot Property yields up towards averages in the region where it is currently trailing (iProperty, for instance, yields 2-3x that of Dot Property, according to Mitula). Although there are clear benefits to the strategy, it does mean that in some markets, Mitula will now be competing with its customers and could push some to churn (we understand that this was an issue for a couple of customers in certain Asian markets following the Dot Property acquisition, but these customers have since returned). While this is a consideration that must be managed carefully, Mitula is not the first aggregator to use this strategy. Indeed (bought by Japan’s Recruit in 2012) employed this strategy in the US, Canada and the UK while also continuing to act as an aggregator. Provided it is not overused as a tactic, it should provide a helpful lever to cross-promote the Mitula brand. We expect management to make increasing use of this strategy in T2 markets, where there are high volumes of visitors to Mitula’s sites, but where yields are very low. In these markets, as well as helping to drive Mitula’s yield, adopting a direct publisher strategy could also have the added benefit of encouraging local competition to start to pay for clicks (or risk losing market share).

We are belatedly updating our forecasts to reflect the September acquisition of Dot Property, along with the Q3 trading update (published November 2016).

Revenue progression in line with forecasts: Q3 revenue growth was broadly as we expected, +20.5% y-o-y and +3% sequentially. The headline rate of growth, which includes one month’s contribution from Dot Property (A$0.4m), represents a slow down on the growth reported in the first half of the year (Q1 74%, Q2 39%) which benefited from the FY15 acquisition of Lokku (acquired in May 2015 for €6m).

Site visits in Q3 increased 26% y-o-y and click outs also grew accordingly. However, the conversion rate to click outs sold fell during the quarter (reflected in a reduction in the yield from 3.7c to 3.6c per visit) and consequently the majority of revenue growth is still coming from Google AdSense (+33%), whereas CPC grew by 4%. Increasing the rate of conversion of click outs to those sold is a priority of the group and a motivation for Mitula’s move upstream into portals (Dot Property).

EBITDA forecasts reduced, affected by investment in growth: we make little change to our revenue forecasts, but update EBITDA forecasts to reflect the additional investment the group is making in sales, the development and marketing costs of the self-serve platform (which will now start to be depreciated but is not yet revenue generating) as well as the costs associated with the build out of the fashion vertical. We also update forecasts for the impact of the A$11m Dot Property acquisition, which was expected to be loss making at the EBITDA level until December 2016. We reduce our EBITDA margin forecast from 56% to 41% in FY16 and from 53% to 46% in FY17 to reflect this investment. The impact of our reduced EBITDA forecast, as well as the cash element of the Dot Property acquisition leads to a reduction in our year end net cash forecast to A$20m.

We summarise our forecast changes in Exhibit 1. Our new forecasts bring us more into line with management’s guidance, for FY16 revenues of A$28m to A$29m and FY16 EBITDA of A$12m to A$13m. In its November statement it also introduced guidance for FY17 where it is targeting revenues of A$38m to A$41m and EBITDA of A$17m to A$19m.

A reverse DCF of the current share price (assuming a WACC of 11%, 25% tax rate, and a terminal growth of 2% after 10 years) implies the current share price is pricing in very little of the medium-term growth or margin expansion. For instance, a share price of A$0.8 would be consistent with management delivering on our FY16-FY18 estimates, but with growth then slowing to 2% with no EBITDA margin improvement beyond this point. While there are many uncertainties when it comes to forecasting into the medium to long term, given the operational progress the group is making, this seems pessimistic. Assuming revenue growth reduces gradually from the end of our explicit forecast period to 2% by 2027 returns a DCF value of A$1.3/share – consistent with the values implied by peer analysis (outlined below). While an element of discount could be warranted due to its smaller size and emerging market exposure, this still points to a valuation considerably above the current share price.

The online classified sector is a highly rated segment of the media market – justified by the strong growth rate of the paid-for online search segment and the sector’s typical high margins. The listed peer group is large and we believe a valuation can be extrapolated to Mitula, which despite its smaller size, enjoys good EBITDA margins growth rates vs peers.

Excluding outliers, the average FY17 EV/ EBITDA for the global peer group (Exhibit 2) is 14.5x, with an average EBITDA margin of 18%. Mitula trades on 8.4x FY17 EV/EBITDA despite its higher forecast EBITDA margin of 46% and sector leading revenue growth rates. Mitula’s FY17 P/E rating looks similarly out of kilter with its peer set. On a FY17e P/E of 13.3x, it trades at a 40% discount to the sector average.

Applying the average sector EV/ EBITDA multiples to Mitula’s FY17e forecasts (which we do not consider overly aggressive given we forecast revenue and earnings growth towards the top of its peer set) derive a value per share of A$1.3 (EBITDA basis) to A$1.5 (P/E basis).

Investors should also consider the following:

Risks and sensitivities