- Strong performance since 2021 IPO
- Exciting growth runway
Classified advertising is nothing new. Lonely hearts columns sprang up in the 1800s, and the back pages of newspapers and magazines have long contained small notices for everything from furniture to nannies. With age comes wisdom, however, and after shifting online this model is still proving lucrative for some.
Baltic Classifieds (BCG) operates online classified ad portals across Lithuania, Estonia and Latvia, advertising cars, real estate, jobs and 'generalist' products. As tech stocks go, it is not glamorous. But wait until you see its financials.
Against an extremely gloomy media backdrop, the FTSE 250 group managed to achieve double-digit revenue and profit growth between May and October last year. It has also upgraded its forecasts for the second half of FY2024 on the back of “continuing momentum” and price hikes. The shares are up over 50 per cent year on year and, of the many businesses that listed in London in 2021, it is one of very few to have increased in value – even though it garnered little attention at the time.
Big fish, small pond
Most UK investors will be unfamiliar with Baltic Classifieds’ websites, which include Autoplius and CVbankas. However, they are big in their core markets. Lithuania, Estonia and Latvia have a combined population of roughly 5.8mn and the portals average 57.9mn visitors every month. This is equivalent to 10 visits per person, making Baltic Classifieds one of the largest online companies in the region. Now it has achieved market dominance, buyers and sellers keep flocking to the platform, creating a virtuous circle.
Baltic Classifieds bears some similarities to Rightmove (RMV) and Auto Trader (AUTO). Indeed, the three groups have a number of players in common. Baltic Classifieds’ current chair, Trevor Mather, used to be chief executive of Auto Trader, and its senior independent non-executive director, Ed Williams, co-founded Rightmove.
Crucially, however, Baltic Classifieds is at a far earlier stage of growth. “The group is considered to be at an early monetisation stage,” management said. “The primary growth driver and focus of the group is to drive increased monetisation of its core services, by increasing average revenue per business-to-consumer [B2C] lister and average revenue from each consumer-to-consumer lister.”
It is succeeding. In the first half of FY2024, B2C revenues grew by a quarter and B2C sales increased by 19 per cent.
At this point in time, though, there is plenty of room for prices to move higher. Investec claimed prices could potentially double “without any impact on customer numbers or transaction values”. There is also plenty of scope to develop ancillary products such as deliveries. Analysts are bullish on further growth despite the tiny population of its home region.
“We do not believe BCG needs to be innovative,” said broker Peel Hunt. “Instead, learning and replicating good practice from western peers should give the company a strong enough runway for growth, in particular due to its dominance in the market.”
It is already extremely high-margin and cash generative. Some money is spent on marketing and IT, but the biggest cost – people – only represents 15 per cent of sales. The group’s adjusted Ebitda margin sits at a whopping 78 per cent, therefore, while its statutory operating margin is 54 per cent now the IPO has been paid for.
Another big attraction is Baltic Classifieds’ resilience. The theory that online marketplaces are immune to economic cycles has come under pressure recently, with Auction Technology Group (ATG) struggling with lower demand for arts and antiques. If anything, though, Baltic Classifieds is actively benefiting from a slower macro environment. In the consumer-to-consumer division, for example, products are taking longer to sell, meaning each advert is active for more time. The group also deploys value-based pricing in some divisions, meaning revenues are higher for pricier objects.
Analysts at Investec even argue that inflation changes our perception of what is good value (consumer prices increased by 18.9 per cent in Lithuania, 19.4 per cent in Estonia and 17.3 per cent in Latvia in 2022).
“If your car has increased €1,000 in value over the past year, paying €25 instead of €20 to list it for a month is unlikely to impact your decision given the small absolute amount of euros, even if it would represent a 25 per cent price rise for BCG,” the bank concluded.
A couple of big questions linger, however. First, some macroeconomic risk clearly remains. The Baltic jobs market, for example, has proved relatively stable with low unemployment so far, but this is not guaranteed to continue. A shock to the economy – or the geopolitical situation – would be likely to impact ad sales, and the region is uncomfortably close to Russia. It is worth noting that shares plummeted after the invasion of Ukraine.
Valuation is another sticking point. With a forward price/earnings ratio of 24.6, Baltics Classifieds is more expensive than both Auto Trader (22.6) and Rightmove (20.2), even though it is trading below its average since listing of 29.
However, the group is expected to grow significantly faster than its bigger peers and has already proved itself in some difficult trading conditions. Customers are taking note – investors should too.
