October 18, 2022
Given the recent volatility and widespread price declines in European equities, we believe it is an opportune time to profile Fairlight’s largest European domiciled portfolio holding and outline the current valuation. Scout24 is the dominant online real estate classifieds portal in Germany with nearly 70% market share and twice the property listings of its nearest competitor. Its primary customers are real estate agents who pay a subscription fee to list properties on the site with additional products available for those who want greater prominence for listings. The business displays all the characteristics of a High Quality Growth company with nearly 50% operating margins, cash conversion above 100% of profits, resilient revenues and a long growth runway. However, in order to understand the investment opportunity today it is worth revisiting the somewhat convoluted journey the business has taken over the past two decades.
A convoluted corporate history
ImmobilienScout (immobilien is German for property) was founded in 1998 as a website that digitized newspaper real estate classifieds. Instead of searching through many newspapers consumers could easily search online for the exact properties they were looking for. The concept was immediately popular and the business was soon expanding into many similar adjacencies. Over the next few years the business launched JobScout, FinanceScout, FriendScout, TravelScout, AutoScout and rebranded the parent organization as Scout24. The rapid success did not go unnoticed and the business was soon the subject of a bidding war between a James Packer/Macquarie Bank consortium and Deutsche Telekom, Europe’s largest telephone provider. Deutsche Telekom ultimately prevailed and in 2007 Scout24 was subsumed into the €65bn behemoth as part of its strategy to stay relevant in an increasingly digital world. The share price of Deutsche Telekom proceeded to languish for the next 5 years and shareholders soon agitated for a sale of the Scout24 assets to unlock value.
In 2011 Deutsche Telekom carved off JobScout and then sold Scout24 to Hellman & Friedmann, a European private equity firm, in 2013. The new private equity owner quickly began its work realizing value by carving off the various other portals, ultimately leaving two core businesses: ImmobilienScout24 and AutoScout24. In typical PE fashion, this new streamlined corporate structure was then brought to market only two years later in a 2015 IPO at €31 per share.
Early troubles in its listed life
Operational performance after listing was strong with continued double digit organic growth, however in 2019 the share price languished not far from the initial float price at €35. Hellman & Friedmann saw the clear opportunity with an asset they knew well and bid to take over the business for a second time at €46 per share. The Board signed off on the deal, however frustrated shareholders revolted with 70% rejecting the offer. After the deal fell through the Board then confusingly initiated a buyback at a price higher than they had only months ago recommended selling at. Clearly management and the directors did not appreciate the value of the asset they were stewarding. Under shareholder pressure, management ultimately agreed to separate the business into two standalone verticals (auto and real estate) in order to unlock value via divestment. Hellman & Friedmann were again quick to seize on the opportunity with a successful bid for the now standalone AutoScout24 division.
What shareholders own today
As of today, shareholders of Scout24 own a simplified business with a singular focus on real estate. It is Fairlight’s view that ImmobilienScout24 was the highest quality portal of the eclectic collection of assets the business has owned over the past two decades. Indeed, while the business was handballed from owner to owner and restructured again and again, the only constant was the relentless revenue growth of ImmobilienScout24. Chart 1 demonstrates the revenue growth of the underlying ImmobilientScout24 business unit with 2022 marking the 22nd year of uninterrupted organic growth.
Prospects for future growth are bright
While the historical track record is impressive, Fairlight believes there still remains substantial opportunities for future growth. Scout24 has lagged other global listed peers (such as REA and Rightmove) in raising prices and selling additional products to agents resulting in substantial latent pricing power. The combination of recurring subscription revenues, small price increases, new product features/upsell and market share gains should underpin high single digit organic revenue growth for the foreseeable future (the business is on track to grow organically 14% in 2022). Given the strong organic growth profile, inherent operating leverage and the ongoing buyback Fairlight believes EPS growth of 15% p.a is achievable.
The Fairlight View
Finding quality is easy but finding mispriced or underappreciated quality is considerably more difficult. Scout24 has a multi decade uninterrupted track record of profitable growth and strong financial characteristics which make it a resilient business even during economic downturns. Nevertheless, its convoluted history, confusing financials and a likely slowing German real estate market have led to an opportunity to buy this high quality long-term grower today at an attractive valuation.