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Treasure Chest: Carsales Discount Undeserved

Treasure Chest | Nov 22 2018

FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. The core business of Carsales.com is solid, the long-term opportunity significant, and brokers believe the discount in the share price is unwarranted.

-Downgrade for the display and finance divisions considered modest
-Broad-based earnings drivers including increased take-up of Premium/Promote
-Dealer support remains firm

 

By Eva Brocklehurst

Carsales.com ((CAR)) is trading at a substantial discount to peers and brokers believe this is unwarranted, given substantial opportunities ahead. The stock experienced a large sell-off in its shares since the highs just after the FY18 results. While several areas are experiencing difficulties, brokers assert the core business is solid and the long-term opportunity internationally is significant.

Admittedly, the company has pullback its expectations for display advertising and Stratton (finance) at its AGM update, both of which will lead to a softer performance. However, as Macquarie points out, the outlook has simply been changed to "moderate" growth from "solid" growth. The broker interprets this as low-to-mid single-digit growth from mid-to-high single-digit growth.

Yet, the stock is now trading at a discount to peers and its long-term average forward PE while display advertising has been resilient despite low growth. Ord Minnett expects revenue in this division to ease back in the first half, although notes management's confidence in a return to growth in the second half.

Management has maintained guidance across all other areas. The stock is now trading on 19.2x FY19 estimates, a -15% discount to its long-term 1-year forward PE. The stock is also trading at a -17% discount to its historical PE relative to the ASX 200 Industrials and, Ord Minnett calculates, more than a -30% discount to both REA Group ((REA)) and Seek ((SEK)). The broker upgrades to Buy from Hold.

Credit Suisse was disappointed with the downgrade to display and the finance services businesses but encouraged by the outlook for the rest of the portfolio. The main positive themes of domestic yield improvement and international growth remain.

Display

Credit Suisse suspects display advertising could be explained by the new car sales data in the Australian market, as recent negative trends resulted in lower expenditure on the more discretionary display advertising. Meanwhile, finance and related services, largely Stratton, appears consistent with recent data on car finance.

Personal car finance has been weak throughout the year and data from the Australian Bureau of Statistics indicates 2018 is likely to be negative in this regard. Ord Minnett expects Stratton to grow ahead of the market but still reduces forecasts. The rest of the business is on track, as dealers continue to use the company's site to sell their products, particular at the premium end. This should ensure gains in depth penetration in addition to regular price increases.

Macquarie upgraded to Outperform several weeks ago, believing there are broad-based earnings drivers including increased take-up of Premium/Promote products. The broker finds it hard to gauge if enquiry volumes are softening, but suspects any impact at this stage is modest, or being countered by growth in the latter products.

Morgans agrees the positives outweigh the negatives, while the business offers investors exposure to growth in online automotive advertising in Australia, Asia and Latin America. Some areas the business are weak, yet market conditions are expected to remain favourable for the next 3-5 years. Excluding early-stage ventures, offshore operations – specifically South Korea, Chile and Brazil – are predicted to deliver good earnings growth.

Facebook

UBS has pointed out that Facebook's Marketplace Autos is launching in Australia, being rolled out slowly to dealers over the next couple of weeks and Carsales.com is one of the inventory partners. The broker suspects the impact on Carsales.com will be modest for several reasons.

Marketplace will not contain all the company's inventory and Facebook users will still need to navigate to the Marketplace section to view inventory. Moreover, horizontals, such as Facebook, tend to lack the same depth of data and features as a pure vertical offering. Moreover, Carsales.com is contextually more relevant for an automotive audience, whilst leads from Facebook are likely to be of lower quality.

FNArena's database is unanimous, with seven Buy ratings. The consensus target is $15.39, suggesting 32.9% upside to the last share price. Targets range from $13.50 (Macquarie) to $16.81 (Morgans).

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