There are few companies that are happy about inflation, but Auction Technology (ATG) might be one of them. The FTSE 250 group, which listed last year, has created an online platform that connects auction houses with potential bidders for everything from tractors to trinkets. When prices for primary goods inflate, demand for pre-owned products rises faster.
The business started life as a magazine called the Antiques Trade Gazette in 1971. It began listing auctions online in 2000, before creating a live bidding platform for antiques in 2006. A website, i-bidder.com, was launched the following year to allow retail companies to sell consumer surplus and returned items.
Over the past decade, ATG has expanded into new products and sectors, including industrial and commercial machinery with the purchase of BidSpotter. It has also spread geographically with the acquisition of Lot-Tissimo in Germany in 2018 and LiveAuctioneers in the US last year. Its platform now boasts bidders from over 160 countries and 3,800 auction houses.
This scale provides a good economic moat for the business, as well as network effects. With so much reach, auction houses are attracted to the ability to list across marketplaces, which in turn attracts more bidders and smaller businesses which are repeatedly drawn to such a large range of items. Its classic platform economics, and as Amazon (US:AMZN), Facebook and Apple’s (US:AAPL) app store have all shown, it can be highly effective.
You may wonder what sets ATG apart from the original internet auction house, eBay (US:EBAY). After all, both sell second-hand goods and benefit from self-perpetuating network effects. The difference is that auction houses vet all the products on ATG’s platforms and put recommended prices on them, as they would in a physical auction house. Because of this, chief executive John-Paul Savent tells us, return rates are extremely low.
The company has been fortunate since it listed in early 2021. Covid-19 lockdowns pushed a historically conservative industry online, and ATG’s partners introduced timed auctions so bidders didn’t need to be online constantly, as they would be in a live auction. In 2021, the number of active bidders grew 20 per cent to 680,000, and across the platform it managed 6mn sales.
This headline growth rate slowed a little on a like-for-like basis in the first half of the financial year to September. But against difficult lockdown comparators, the top line is still trending in the right direction, aided by the wave of inflation in both Europe and North America.
This has been especially true of the industrial and commercial (I&C) division, which has benefited from supply chain disruptions and inflation in the primary market. I&C covers machinery for manufacturing, pharmaceuticals, construction and agriculture, and makes up around half of total group revenue. If it is more difficult and costly for a buyer to acquire goods from abroad, then the appeal of cheaper domestic second-hand alternatives grows. In the six months to March, I&C pro-forma revenue rose 16 per cent.
Over the same period, total hammer value rose 27 per cent to £4.9bn across the group. This drove adjusted pro-forma revenue (which includes the LiveAuctioneers acquisition) up 16 per cent and adjusted cash profit up 58 per cent, giving the business a healthy adjusted Ebitda margin of 46 per cent.
As ATG is a platform business, it is capital light. Adjusted free cash flow was £24.3mn which translates to an adjusted free cash conversion rate of 91 per cent. This strong cash flow will come in handy given the recent £377mn acquisition of LiveAuctioneers, which pushed up net debt to £122mn after a $204mn (£172mn) senior facility was drawn down in full in September. The deal also explains most of the sharp jump in intangible assets and goodwill on the balance sheet since the group listed.
Although the LiveAuctioneers acquisition came at a price – and was probably timed when company valuations were peaking – it provides a clear path to future growth. The site is a leading arts & antiques (A&A) platform in the US and instantly adds 1,600 more auctioneers to ATG, as well as exposure to a market that is twice the size of the UK and has consistently grown by double digits in recent years.
Besides as geographic expansion, ATG has added to the items it sells through the platform, most notably real estate, and has launched a new payment product. In its own words, management sees growth coming from a combination of network effects, expansion into new verticals and geographies and improved operational leverage. In non-consultancy jargon, the aim to is to attract more users in more countries and then merge the back-office functions of its acquired businesses to lower costs.
These all seem like realistic aims, although macroeconomic headwinds could provide a check on ambitions in both the US and the UK. So far, inflation has been a tailwind to the business. However, this has occurred at a time when GDP was still expanding because of government stimulus. In a world where economic output is shrinking, as many economists expect in the coming year, there will be less cash around to spend regardless of whether it is on primary or secondary goods.
The good news, at least for ATG, is that the supply of goods may rise in a recession. Products are usually put up for sale when individuals and businesses are strapped for cash. The i-bidder platform, which allows retailers to sell surplus items, will also benefit. There is already news of companies being unable to move their huge inventories – most notably at Walmart and Target in the US. In the UK, firms such as Marks and Spencer (MKS) and Dyson have been selling of their surplus goods on i-Bidder.
While superficially very positive for ATG, the question is whether there will be enough demand from buyers.
Analysts aren’t too worried about the recession threat. In recent months, the 2023 consensus earnings forecast of 34.6p per share hasn’t been revised down. Peel Hunt sees the 32 per cent fall in market value in the past six months as investors reacting to “perceived threats of inflation, wages, macro weaknesses, and retraction of the shift to e-commerce”, rather than an issue with ATG’s business. The broker also believes ATG is trading at an unwarranted 18 per cent discount to the median 2023 EV/Ebitda rating of a platform peer group that includes Trainline and Scout24.
Over the medium term, management expects pro-forma revenue growth in the mid-teens and a stable adjusted Ebitda margin of more than 40 per cent. With a forward free cash flow yield of around 3 per cent, this is a growth business with some high-quality characteristics.
So far, the group has managed to navigate macroeconomic concerns, which is no mean feat given the struggles of big retailers with large ecommerce platforms. The question for investors is whether this can continue.
We think it can. In a world of permanently disrupted trade, rising labour costs, and a growing awareness of recycling, making the most of the products we already have will be essential. The circular economy is the future and ATG could be the platform that helps make it happen.
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