Carsales.com: Setting up multiple long term value drivers
About the author:
- Author name:
- By Anthony Porto
- Job title:
- Former Senior Analyst
- Date posted:
- 17 August 2021, 9:00 AM
- Sectors Covered:
- Online, Emerging Tech
- CAR’s FY21 result and growth outlook has justified the recent share price run, with results coming in at the top end of guidance provided in mid-May, and CAR pointing to a number of product initiatives to drive long term growth.
- We make minor changes to near term earnings forecasts, but more substantive in the longer term (increased confidence in the transactional opportunities in all businesses). Our valuation increases 15% to (login to view).
- Despite being favourably disposed to CARs longer term growth opportunities and current business resilience, a strong recent share price run has us back on a Hold.
FY21 comes in at top end of guidance, 2H trajectory bodes well for FY22
FY21 headline metrics (on an adjusted basis excl dealer rebates during 1H lockdowns) of Rev $437.8m (+4% on pcp) EBITDA $254.2m (+10%) and NPAT $152.8m (+11%) all came in at the top end or above guidance provided in May.
2H revenue growth (+9%) bodes well for FY22, with the 2H cost base (2H margins down 350bps on 1H) more reflective of a normalised cost base going forward.
With CAR not currently envisaging a return of ‘dealer rebates’, despite the worsening lockdown situation, larger optical FY22 downgrades have been averted.
New/enhanced products and International expansion to drive growth
CARs consumer traffic dominance is driving adoption of new products in the C2B space (Instant Offer, Dealer Direct) and B2C space (certified listings, delivery).
The launch of CAR’s fully fledged e-commerce offering ‘Carsales Select’ leaves the company well placed to drive future growth from the increased willingness of the consumer to transact online, whilst also providing a defensive mechanism against e-commerce retailers looking to enter the domestic market.
With International now ~38% of look-through revenue (incl the yet to be finalised TI acquisition) CAR’s growth profile will become increasingly reliant on these businesses. Strong operating metrics, and resilient financial performance, sees these main drivers of Intl value (Encar, Webmotors and TI) well placed.
Forecast and valuation update
At an aggregated level we make only minor changes to our near term forecasts, with an improved domestic growth trajectory offset in part by downgrades to our overly optimistic Encar (Korea) forecasts.
Despite incorporating some increased transactional revenue into our domestic growth profile, at only 5% of our FY26 revenue forecast (9% of current) we see plenty of upside potential, with CAR calling out an eventual shift from a ‘leads model’ to a ‘transactional charging model’ for dealers.
Our DCF based valuation has increased 15% to (login to view), a function of rolling our model, a slight decrease in the WACC (15bps) from a lower COD assumed, and an improvement to our longer term domestic growth profile.
We believe CAR is laying the foundations for sustained longer term growth, both domestically and internationally, whilst fortifying the moat around their business by enabling dealers to bring most of the transaction online.
Despite the above view, with the stock having appreciated 34% since we moved to an Add rating post the announced acquisition of TI, we see the risk/reward payoff in the stock as now more evenly balanced, thus moving to a Hold.
Early evidence of support from dealers for ‘Carsales Select’ accompanied by indications of CAR’s ability to monetise this product ahead of current expectations.
AGM trading update which will include further detail around TI’s trading.
Upside risks include new product adoption ahead of expectations and Intl businesses rebounding out of COVID better than expected.
Downside risks include competing business models (auto e-commerce) general valuation of growth stocks, minor balance sheet risk (PF LT ND/EBITDA ~2.5x)
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