The share price of one of our portfolio holdings Frontier Digital Ventures (FDV) has fallen -14% since major shareholder Catcha Group reduced their ownership by half in early 2021.
In this post, we share an answer to a recent client query: why would you hold on to FDV when a major insider is selling?
Company overview
FDV is an investment holding company focused on owning the leading online marketplace 1.0 businesses in the Emerging Markets.
The below graphic showcases FDV’s portfolio: 16 companies operating across 21 countries in Asia, Latin America, Middle East and North Africa.
By marketplace 1.0, we mean B2C marketplaces dealing with online classifieds categories such as real estate, jobs, cars and used goods. These categories are already extremely mature and understood within developed markets like Australia/ NZ – think legendary websites like realestate.com.au, SEEK, Carsales & TradeMe.
Investment case
We are attracted to FDV’s investment style which can be likened to a venture capitalist specializing in first-generation marketplaces.
FDV invests in marketplace companies which require additional capital to grow. The new capital injections allow these marketplaces to entrench their early leadership positions, which they can then leverage to merge with competitors in order to hopefully cement long-term network effects.
FDV then selectively monetizes certain investments through a sale to other investors, or IPOs after several years of rapid revenue growth. Ownership stakes in the less risky, quality marketplaces are retained.
Take Vietnamese property marketplace Propzy as an example. In 2017, FDV acquired 29% of Propzy for $1.2m. That year, Propzy was annualizing approximately $0.6m of revenue. By 2019, Propzy was delivering approximately $10m of annualized revenue, after which FDV subsequently sold their shares for $7m, achieving a +300% return on investment over 2.5 years.
The marketplace investments made by FDV have several risk factors. The first risk is that they are illiquid – meaning FDV cannot easily exit their positions if they are not working. Second, the investments are capital-intensive – each company being bought has elevated probability of requiring further capital injections before true market leadership is achieved, usually in the form of merger with the nearest competitor.
On the flipside, FDV as a first-generation marketplace specialist can apply its knowledge across multiple markets to assist its portfolio holdings to optimize business strategy, assess consolidation opportunities with third parties – in effect, FDV helps its portfolio companies manage the execution risks that we described above.
Is FDV overvalued?
The fact that the major shareholder Catcha Group sold down half their stake invites the question: is FDV overvalued? If it is not, why would the smart shareholder sell?
Our response is: as long as FDV management continues its fine track record of managing the risks around early-stage first generation marketplaces, we can expect to earn a fine annualized return on our investment.
In particular, we do not feel the valuation of FDV is egregious. We estimate FDV currently trades at 8 times its economic share of forward revenues, being ~$55m. Middle quality, online classified companies in Australia such as Domain and Carsales trade on 10x forward revenues – yet these are mature-stage companies annualizing $280m and $430m of revenues respectively with 40-50% pre-tax profit margins!
Suffice to say, we expect FDV’s portfolio of early-stage marketplace leaders to grow their revenues at double digit rates far longer into the future than mature-stage peers like Domain and Carsales. We feel that the superior growth profile of FDV alone should underwrite more-than-adequate returns on our investment at the current share price.
So why did Catcha sell? Perhaps they sold because they can find deals which are not currently available in the public markets, which they feel have even more exciting growth profile than the early-stage first-generation marketplaces owned by FDV.
As for us at Glennon Capital, we are happy with the returns that are on offer with FDV. We just need to be alert to potential disruptive business models which could threaten what ought to be reasonably strong long-term growth rates and which could prevent FDV from eventually earning the profit margins enjoyed by mature marketplaces today.
Till next week, happy investing,
Michael & Kenny
