Australia | Aug 17 2021
Carsales.com is confident the business can recover most of the pandemic-induced weakness once retail re-opens, noting consumer demand remains strong
-Dynamic pricing helped offset weakness in H2 listing volumes
-New and enhanced products expected to drive growth
-Monetisation of Carsales Select will take time
By Eva Brocklehurst
Carsales.com ((CAR)) continues to develop new products to entrench its dominant position in the Australian vehicle advertising market. Mobility restrictions are creating uncertainty yet management is confident the business can be positioned to recover most of the weakness once retail re-opens.
Carsales has indicated FY22 growth will likely be weighted to the second half, noting consumer demand remains strong although domestic inventory has started to build.
UBS found the outlook for FY22 positive, yet anticipates lockdowns will create uncertainty over the short term and the absence of JobKeeper will likely drive FY22 cost growth above the rate of revenue growth.
Ord Minnett believes the impact of lockdowns has been well managed. Despite new car shortages, advertising expenditure on automotive brands has been improving steadily. Dynamic pricing is also assisting, probably helping to offset weakness in second-half listing volumes.
Given the eventual re-opening of the economy, Ord Minnett expects FY22 and FY23 online advertising revenue will increase 2.5% and 3.3%, respectively.
There was a significant reduction in total inventory on site since the beginning of the pandemic, Macquarie points out, amid a significant reduction in time to sell coupled with new car production constraints.
The broker highlights the benefit from this favourable demand/supply mismatch in the automotive market yet considers Carsales' valuation relatively full, while Morgans suggests the results and outlook have justified the recent run-up in the share price and pulls back to Hold from Add.
Morgans makes more substantial changes to longer-term estimates amid increased confidence in the transaction opportunities in all businesses. The broker suggests new and enhanced products, such as Dealer Direct and Instant Offer, as well as business-to-consumer certified listings and international expansion, will drive growth.
The company has introduced dynamic pricing for private customers, allowing for yield expansion. Trader Interactive revenue grew 12% in the second half, benefiting from price rises in April which translated to an operating earnings (EBITDA) margin of 104%.
Ord Minnett considers the stock, trading on an FY22 multiple of 35.2x, is stretched compared with historical averages. Yet there are a number of considerations which make the broker incrementally more positive, including the Select business and the meaningful contribution by FY23 implied by the update to Trader Interactive.
International business continues to grow as a percentage and Macquarie notes, if Trader Interactive was consolidated, the international segment would be 35% of revenue.
On the less positive side, volumes in the tyresales online portal declined because of the impact of the pandemic. The company still believes an opportunity exists over the longer term but Macquarie asserts there needs to be more evidence of profitability.
Carsales Select suggests to Goldman Sachs the company is looking to be the "go-to" digital platform, aggregating its traditional inventory. Over the longer term Select should allow Carsales to move to a transaction-based model from a lead-based model, resulting in a financial benefit to dealers.