What connects a first edition of Harry Potter, an industrial-sized blender and an orthopaedic dog bed? Nothing, other than the fact they were all sold via Auction Technology Group (ATG) last year. This snapshot captures something of ATG’s scope and scale: it links up bidders from 165 countries to more than 3,900 auction houses via eight online platforms, facilitating the sale of 22mn items every year. All lots are vetted and priced before they go under the hammer, and big names such as Sotheby’s and Christie's are on board.
ATG is still small, with a relatively short track record as a public company – it listed on the main market in February 2021 and has a market cap of about £600mn. But it occupies a powerful position in the world of auctioneering. It also bears more than a passing resemblance to UK platform giants Auto Trader (AUTO) and Rightmove (RMV), suggesting there could be plenty more growth to come if it plays its cards right. Sanford DeLand’s Eric Burns, who co-manages the CFP SDL Free Spirit Fund (GB00BYYQC271), certainly thinks so.
“ATG is enabling auction houses to get listed on websites and it is also finding buyers,” says Burns. “This is creating the holy grail when it comes to investment: the network effect.
“Because the businesses have got critical mass in each of their markets – in fact they are number one in their marketplaces – a virtuous cycle forms. People sell on there because they have access to the most eyeballs, and people look on there because they have access to the biggest range of products.”
Auctioneering is still “quite an outdated and traditional marketplace” in his view, so this virtuous cycle is only just getting going. ATG also has a first-mover advantage. While it started life as the Antiques Trade Gazette, it began to acquire online platforms back in 2006. “That meant it was fairly early to the party," says Burns. "There has been a hell of a lot of growth in the 17 years since then."
Burns argues that ATG’s already dominant market position, combined with the network effect it enjoys, should protect it from competition. Big platforms are not completely immune to shocks, of course. Shares in Rightmove tumbled in October after a New York-listed property giant bought rival OnTheMarket in a bid to challenge the status quo. But Burns thinks these companies look resilient over the longer term. In the case of Rightmove, he bought the dip.
ATG’s latest results attest to its strengthening position. In FY2022 the group reported a statutory pre-tax profit for the first time since listing, and managed to sustain profitability into 2023. Auctions facilitated, lots listed and new account registrations all enjoyed double-digit growth last year, while organic growth was robust at 5 per cent.
"Value added” services provided a welcome boost. The main way ATG makes money is from commissions, but it also charges listing fees and earns extra cash from marketing, payment solutions and – most recently – shipping services. This is an important area of growth and value-added services now account for 18 per cent of total revenue, versus 9 per cent three years ago.
Share price hammering
Despite all of these positive developments, however, ATG has not been a good investment so far. The shares have fallen by almost 40 per cent since the company listed three years ago. Burns did not invest at IPO (“we like to see companies establish themselves on the market and build up a track record”) and instead took a position in April 2023. Even since then, however, the shares have fallen by 16 per cent.
Much has to do with ATG’s exposure to macroeconomic conditions. For a long time, advocates considered it to be “cycle neutral” due to the diverse range of products on its platforms and its varied customer base. This theory has not held up, however. The auction market saw “some softening” of demand in the second half of FY2023 and total hammer value (THV) – ie the final sale value of all lots listed on ATG platforms – fell by 5 per cent in the same period.
This is clearly an issue given that ATG makes most of its money from commission. The situation is made worse by the fact that the proportion of all lots won by ATG bidders also dipped, “reflecting the physical auction reopening impact post the Covid-19 pandemic”.
The arts & antiques division, which generates about half of group sales, was a big part of the problem. Management said macroeconomic uncertainty had impacted consumer spending, and in the second half of 2023 THV decreased by 2 per cent at constant currency. A wider slowdown in the luxury sector – as evidenced domestically by Burberry’s (BRBY) recent struggles – suggests that these issues could persist.
The industrial & commercial division, which generates the other half of group sales, looks more resilient but is still feeling the pressure. On the plus side, the supply of secondary assets has gone up because business insolvencies are rising and fire sales are becoming more common. But a greater supply of items has in turn driven down prices.
The market did not react well to the 2023 results statement and the “relatively uncertain” outlook for 2024. But Burns is still confident. “We believe the share price reaction to the tempering of short-term expectations to be overblown,” he says. His time horizon is “the next five years, not the next three months”; Sandford DeLand upped its stake in ATG shortly after the figures were published on 30 November.
Balancing the risks
ATG’s balance sheet is one area to keep an eye on, however. “As a rule, we tend to like strong balance sheets that are not indebted. Within our portfolio, this is one of the more indebted businesses,” says Burns. This is a result of two things. Pre-IPO, ATG was owned by private equity and private equity famously likes to use leverage. Since then, it has also made a number of acquisitions, which have been funded partly with debt.
Adjusted net debt/Ebitda decreased from 2.4 times to 1.8 times last year, which was reassuring. ATG is also very cash generative, but Burns says he would be “happy if they don't do another acquisition for a while. There is plenty of organic growth to go for. Our investment is not predicated on acquisition after acquisition.
“I wouldn't want to wake up one morning to find they have bought something for £200mn on a racy multiple. Then it would be time to reassess.”
There is little room for error when it comes to ATG’s purchases. “It’s not like other M&A businesses where it’s all about the synergies and cost savings,” says Burns. “They need to stack up on their own.”
Management does not seem inclined to do anything too risky, telling analysts in December that it was focused on reducing debt. “Never say never. But the hurdle rate is… much higher than it has been to do any M&A ,” said finance chief Tom Hargreaves.
Old acquisitions could still cause problems. Goodwill accounts for well over half the assets on ATG’s balance sheet and — with growth under pressure – analysts are getting nervous about impairments. A particularly big purchase was made during lockdown “on a very full multiple” when valuations were sky high, and in 2022 management flagged that the art & antiques division had “limited headroom” and was “very sensitive to a movement in any one of the key assumptions”.
Hargreaves said on the latest analyst call that a number of factors, including a year of amortisation and a fall in the weighted average cost of capital originally used to calculate headroom in September 2022, had produced the “significant deemphasizing of that goodwill impairment” in the FY2023 accounts. But it still looms in the background, and could make investors even more jittery than they are at the moment.
Burns suggests that much of this risk is now factored into the price. Over the past five years, ATG has traded on an average price/earnings (PE) ratio of 40, reflecting its purported status as a shiny tech stock. Today, its forward PE ratio sits at just 14.4.
There are no obvious catalysts that will cause ATG’s share price to shoot back up. However, Burns has faith in the underlying business model and believes that it will be enough for ATG to keep its head down and continue meeting its goals. “A combination of ATG delivering and growing, and market conditions and sentiment improving – that is what will supercharge the return.”
