Is Frontier Digital poised for a re-rating?

By Market Index
Thu 06 Jan 22, 8:57pm (AEDT)
Swing to online bodes well for Frontier's higher return property and automotive portals

Key Points

  • Frontier appears undervalued relative to its peers
  • CEO Shaun Di Gregorio plans to build a $3.5bn to $5bn global operation
  • As an insider-manager, CEO Shaun Di Gregorio has some serious 'skin in the game'

Online classifieds business, Frontier Digital Ventures (ASX: FDV) expanded its Latin American footprint just before Christmas when it acquired the remaining 73.7% of Central America based Encuentra24 for $13m plus earnouts.

Included within the deal is a 37.5% interest owned by OLX Group, which is the other major shareholder in Frontier’s other core asset, a 30% stake in real estate website a leading property portal based in Pakistan.

After paying an initial $13m for Encuentra24, Frontier has raised $35m from large investors, while an additional $5m is coming from small investors at $1.50.

It’s understood that $20m will be earmarked to continue the company’s growth-by-acquisition strategy, and progress CEO Shaun Di Gregorio’s plan to build a $3.5bn to $5bn global operation.

Higher return property & automotive portals

Since founding the company in May 2014, Di Gregorio has successfully expanded the company into three regions – Latin America (LATAM), developing Asia and Middle East and North Africa (MENA).

With a market cap of $551m, Frontier entered the S&P/ASX All Technology Index last year and given its recent growth tractor, could be heading for the S&P/ASX 300 Index at some future date.

The company’s focus is primarily on the higher return property and automotive portals.

During a recent market update, Di Gregorio advised investors that all of the company’s businesses are fundamentally online classifieds\businesses and are all number one in their market.

Much of the company’s business strategy revolves around partnering with local teams in line to become the leading operator of the best online marketplace in emerging markets.

For example, the company also has a 37% stake in automotive website and similar businesses in the Philippines, Morocco, and South America.

Why Frontier shouldn't be ignored

While Frontier is too small to be on the radar of all brokers’ analysts, the fact that institutional investors have bought into the company should not be underestimated.

While the top 20 shareholders control 78.33% of shares on issue, the general public still holds a sizable 42% stake.

It’s important to recognise that ‘insiders’ - including Di Gregorio who control 11% of common stock - have an estimated (circa) $56m worth of shares in their own names. 

This means that those running the business are seriously invested in the business succeeding.

It’s also important to note that despite recent diversification within the business, Frontier continues to trade at a significant discount to similar global businesses based on market value sales.

Swing towards online

Given the swing toward online Auto and Real Estate transactions, Morgans had further reason to increase its the target price to $1.82 from $1.68 and maintained its Add rating late October 2021.

The broker noted a strong third quarter from Frontier, with revenue growth up over 100% on the previous corresponding period. 

However, while Morgans lifted revenue forecasts, the broker suspects this could be offset by higher costs, as the company invests for the long term.

Consensus on Frontier includes two Strong Buys.

Based on Morningstar’s fair value of $1.68 (23 November 2021), the stock looks undervalued.

The stock is currently trading at around a 16% discount to its 2 November 2021 share price of $1.81.

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Market Index

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