Trade Me's owner, Fairfax Media, is offering 34 percent of the company in an initial public offering at $2.70 a share to raise $363.5 million.
The IPO closes on December 6, with shares scheduled to begin trading on December 13 on both the New Zealand and Australian stock exchanges.
Woodward is targeting a share price over the following 12 months of $2.80, although it suggests early demand could push it higher, given expected heavy over-subscription for the issue.
On a dividend yield basis, Woodward values Trade Me at $2.52 per share, and $2.46 a share on an earnings multiple basis, using a multiple of 10.85 times. Woodward's own valuation is $2.54 a share, based on a range of valuation approaches.
Fairfax bought Trade Me in 2006 for $750 million, including a post-sale earn-out for its founders.
Among its strengths, Woodward lists an experienced board and management team, the company's dominant market position in all but one of its business categories, and its likely ability to raise prices, although it notes Trade Me is experiencing declining margins as the business entrenches in the New Zealand market.
Woodward also speculates that, post-float, Fairfax could seek to pump additional debt onto the Trade Me balance sheet, which it says is under-geared at 20.8 per cent, with $166 million of new bank debt.
"We believe the company could readily support in the order of a further $300 million of senior and subordinated debt," said Lewis, noting Fairfax has announced it will be seeking to reduce debt on its own books.
Lewis also warns that Trade Me may struggle to find ways to add value to its existing business, but may be tempted to undertake acquisitions because it will be accumulating around $15 million a year in cash, even with a dividend pay-out rate of 80 per cent.
"Trade Me's board and management will need to ensure the company keeps to tight financial disciplines in order to ensure shareholder value is not eroded."