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Trade Me shares tumble to 19-month low on slower earnings growth

Shares in Trade Me Group [NZX: TME]  fell to a 19-month low, making the stock the worst performer on the benchmark NZX 50 Index, after New Zealand's largest online auction site posted lower-than-expected first half profit, raising doubts about its future earnings growth.

LATEST: As shares reel, Trade Me boss has good news/bad news on property stoush, expenses and new goods sales

Trade Me shares fell as low as $3.68, and recently traded down 6.2 percent at $3.80.The Wellington-based company said first half net profit rose 2 percent to $38 million, slower than the 2.7 percent earnings growth in the year earlier period and below First NZ Capital's estimate of $40.9 million.

Trade Me employed an extra 50 people in the past six months, taking its total headcount to 350, as it strives to improve its web site, adding more services and functions, in order to grow future profits. Expenses rose 19 percent to $25.2 million, outpacing 6.6 percent revenue growth to $85.7 million. In the second half, the company expects expenses will continue to accelerate at a faster pace while revenue will grow only modestly, leading to "subdued" full-year earnings growth.

"It was a weak result, revenue growth was far lower than expected whereas growth in expenses was quite high, which really meant that net profit was pretty flat so that was very disappointing," said Mark Warminger, who helps manage $710 million in New Zealand equities at Milford Asset Management. "There is going to be material downgrades right across the board for this year and for next year. It doesn't really look like the business is going to turn around any time soon especially with poor revenue growth and higher costs going forward."

Milford sold down its holding in Trade Me, which was spun out of Fairfax Media in 2011, after the shares reached around the $4.50 to $5 level, believing the stock was expensive for what the fund manager considered a low growth company.

The stock is currently trading at around 17 times its expected 2014 earnings, when it should be trading around 14 times earnings given its growth and maturity, Warminger said.

Revenue growth in the latest period was the most disappointing aspect of the result, Warminger said.

Sales from general items fell 1.6 percent as it suffered increased competition as a high New Zealand dollar made new goods from overseas websites more competitive than many second-hand goods from Trade Me, Warminger said.

Trade Me is struggling to boost revenue from new areas, such as the sale of new products through its web site better known for second-hand goods, and its plan to increase fees that real estate agents pay for listing properties through the site, Warminger said.

"Really what it is looking like at the moment is a mature business which is having poor earnings and it is trading on a high valuation which is never a good combination," he said.

Trade Me reiterated today that it expects stronger profit growth over the course of its 2015 financial year. Before today's earnings, analysts were expected the company to increase full-year profit 7 percent this year, before picking up to an 11.2 percent pace in 2015, according to analysts polled by Reuters.

"We've embarked on a period of reinvestment which will impact short-term earnings growth but ensure the company's long-term growth and success," said chairman David Kirk. "We are convinced this is the right approach for Trade Me and we believe investment now will result in stronger market positions and greater growth opportunities in the future."

Investment in the business had gone well and Trade Me will continue to "invest assertively" in the second half of the company's financial year, Kirk said.

Trade Me will pay a first half dividend of 7.6 cents a share on March 25.

(BusinessDesk)

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Comments and questions
4

Greed in your fees, are about to bite Trade me on the bum!! with a complete decimation of the real estate section watch and see.

The main issue is that their core business is quite mature, with relatively limited organic growth. And adding to this, they haven't truly been successful in diversifying from this core, with many of their efforts in new verticals having limited success.

Interestingly it positions them as the slower moving incumbent that the new upstart innovators want to pick off - just as they themselves did to their competitors many years ago.

Real growth can only come from acquisitions into new verticals and/or a substantial purchase of an online entity in Australia.

Raising fee's only gets you so far and it also p1sses off your existing customer base.

Their realestate section this year has the possibility of imploding due to rate hikes.

For some time now, I have been a top seller on Trademe with an extensive back ground in business startups/marketiing etc etc etc. On one of their many, frustrating and increasing changes to the site, I rang them on one occasion out of pure frustration and, also told them how they could get me to double my spend with them in a heart beat, if they retained a format they once had, and adopted my idea which I went on to outline to them. They young whipper snapper on the other end thanked me for my input, noted it and would put it to the "team" to consider, along with all the other ideas. Well duh, the idiots haven't adopted my idea and obviously don;t want me to double my sales and for them to make double the fees (if not more), that they are currently whacking me for. Shareholders should be up in arms that they are not listening to their customers, especially top sellers like me