Team Internet Group — Stability amid setbacks

The performance of Online Marketing reflected a number of factors, with the Online Advertising business battling headwinds, Comparison performing strongly, and Shinez, which was acquired in April, performing materially below expectations. Gross revenues contracted by 1% y-o-y to $471m for the first nine months with net revenues growing by 1% to $95.4m. Q3 saw a 1% y-o-y contraction in gross revenues to $169m (we estimate an organic 7% contraction, excluding Shinez), while net revenues contracted by 6% y-o-y to $30.4m.

The company’s established Online Advertising businesses, TONIC and ParkingCrew, delivered a 15% increase in consumer journeys to 6.5bn in TTM 2024. However, the seasonal H2 uptick has been weaker than anticipated and click prices remain under pressure. Revenue per thousand sessions (RPM) dropped by 18% from $97 to $79 on a trailing 12-month basis. The group has been pursuing higher traffic quality metrics and shifted spend away from short-form video, which likely suppressed volume growth somewhat although the optimisation of traffic toward the most effective channels will be key to driving a recovery in growth. The company’s investment into a search on content business model, whereby advertisements are displayed based on the content of a page rather than user search queries, is also seen as key to driving volumes and CPM rates.

Vergleich (or VGL), Team Internet’s Product Comparison business, performed strongly in Germany, while the launch of the platform in France, under the Meilleurs Points D’Affaires brand, is showing promising results. TTM RPM has increased 19% to $246, with visitor sessions 33% higher, indicating a growth rate of 58%, and the division has now grown to an extent whereby management plans to break this out as a separate reporting segment.

We expect the company’s internationalisation drive to move forward at a faster pace, opening up a significant new path for potential growth and margin expansion.

The company’s increased use of paid search to direct potential consumers to its sites is expected to facilitate this internationalisation drive, giving the company more control and visibility of the cost to secure visits from potential consumers in these new markets. Historically, VGL primarily used organic search and SEO to direct potential consumers to its sites, which, while cheaper on average than paid search in Germany, is less reliable and can be affected by algorithm changes.

Shinez, which was acquired on 29 April 2024 for US$41.8m, performed significantly worse than anticipated and is not expected to contribute materially to profits in FY24 or FY25. In the five months since acquisition, Shinez generated revenues of $21.7m and an adjusted EBITDA loss of $0.5m, a substantially lower run rate than the $111m revenue and $10.4m adjusted EBITDA this business registered in 2023.

The company cites unexpected reductions in demand from key advertising network partners, caused by operational and compliance issues that have since emerged. Management has implemented corrective actions, including the integration of additional advertising inventory and the refinement of revenue optimisation strategies. Initiatives to achieve synergies from Shinez technology, content library, social media reach, behavioural data and workforce are also expected to strengthen the group’s competitive position. However, it is imprudent to assume any significant recovery in the near term. Management is also exploring protection mechanisms under the share purchase agreement.

The Online Presence division is mid-way through an initiative to consolidate platforms, optimise pricing, improve efficiency and margins. This process is expected to run through to mid-FY25, which should benefit margins through to FY26 when the full-year impact will be felt. In the near term, top-line growth is being slightly suppressed by the pruning of business with sub-optimal profits.

Revenues grew 5% to $144.1m for the first nine months with gross profit growing by 9% to $48.2m. The respective figures for Q3 were 4% y-o-y growth to $46.9m with gross profit stable at 33%, although management commentated that operating profits were significantly improved (segmental reporting only reports to gross profit).

Reflecting the issues at Shinez and the lower-than-expected seasonal uptick in advertising demand, we now expect essentially stable revenue and EBITDA performance through FY24 and FY25 versus low double-digit growth previously. Our estimate changes are detailed below.

Circa 50% of the (gross) revenue downgrade stems from Shinez, which we now expect to operate at broadly break-even in FY24 and to make a low single-digit EBITDA profit in FY25. We also moderate our estimates for the organic online marketing business, assuming that the online advertising market remains subdued. The internationalisation of Comparison should help growth, particularly at the net revenue level (as this is a higher-margin business line), but at this stage we do not have enough data to model this explicitly.

Growth expectations for Online Presence are moderated slightly, which is in part precautionary but also reflects the pruning of services and customers as part of the ongoing efficiency programme. This programme is expected to complete in mid-FY25, which should generate progressive margin benefits through FY25 and FY26 when the full impact will be felt.

Despite the setbacks, EBITDA has remained stable and cash generation healthy, and we expect this to continue. Net debt reduced by $10.2m in Q324 to $99.7m. Operating cash conversion was 91% in the quarter and is expected to normalise close to 100% in Q4. The company has plenty of headroom in terms of debt (1.2x EBITDA TTM) and the dividend is over 9x covered. Management is exploring options to deliver shareholder value including balance sheet optimisation through share buybacks and dividends, as well as a comprehensive review of asset ownership.

While it is a setback to be downgrading estimates, we believe that Team Internet’s valuation looks overly discounted on both a relative and absolute basis. If the company can demonstrate steady trading over the next quarters, in line with our revised estimates, we believe the shares will start to rerate upwards again. Successful execution of synergies and management initiatives to deliver value through capital returns or asset returns could deliver substantial upside.

On an absolute basis, the company’s FY25e P/E of 5.6x with a respective FCF yield of 20% would appear to factor in concerns of further downgrades, rather than steady performance, as we forecast.

We believe our estimates are prudent and that there are potential catalysts for upside (eg ad spend recovery and good progress with the internationalisation of Comparison). The company’s strong cash generation gives management multiple options to return or deploy capital through buybacks, dividends or accretive acquisitions if the right assets can be identified.

With management now reviewing the ownership of its assets to deliver value, a sum of the parts (SOTP) valuation becomes increasingly relevant. Current disclosure hampers an accurate SOTP analysis, although we expect segmental reporting down to the EBITDA level and Comparison to be broken out for the FY24 results. At group level, Team Internet trades at a substantial discount to Online Advertising peers – 29% on FY25e EV/EBITDA and 58% on P/E. The discount to Online Presence peers is slightly larger, although the variance in this peer group is large.