Carsales.com: Adding another cylinder to the engine

About the author:

Anthony Porto
Author name:
By Anthony Porto
Job title:
Senior Analyst
Date posted:
17 May 2021, 2:30 PM
Sectors Covered:
Online, Emerging Tech

  • Despite Carsales.com (ASX:CAR) paying a 'full price' to acquire a 49% stake in US based non-auto marketplace Trader Interactive (TI), we are supportive of the deal, believing TI to have a sound base and competitive position, from which we believe CAR can re-invigorate topline growth. 
  • The acquisition provides another growth angle for CAR, who have shown ability to generate good returns from their larger International acquisitions (Encar and WM). 
  • CAR's trading update was broadly inline with our forecasts which were likely towards the top-end of consensus, with both the domestic operations and Encar (Korea) stated to be performing well. 
  • We move to an Add rating, upgrading our target price by 7% (login to view). We see CAR as providing the best growth/valuation trade-off amongst the domestic classifieds players at present.

TI Acquisition - paying up for the growth they are likely to drive

In one of the better deals for PE, CAR’s acquisition of a 49% stake in Trader Interactive (TI) for US$624m (~A$808m at current spot FX) at a trailing EV/EBITDA multiple of 26.5x (a 28% premium to their comparative multiple) appears quite full (PE having paid US$680m for the whole asset in 2017, with some acquisitions added since).

This for a business that has grown revenue at a ~4.8% CAGR over the past 2 years. Having gotten our head around the above, we are supportive of the deal and see the strategic merit.

TI appears to have strong market positions in a number of verticals, in a large addressable market (4x domestic auto, 16x domestic non-auto) with upside from increased dealer penetration and improved monetisation of existing dealers.

We back CAR’s expertise to deliver product and user experience improvements in TI to drive topline growth ahead of historic rates. Additionally, the multiple paid is only slightly above the most recent large comparative transaction (the 26.1x trailing multiple paid for AutoScout24 in early 2020).

Trading update broadly in line, cost focus continues

CAR’s trading update, which was slightly below our seemingly towards the top of the market forecasts (-2% at Revenue, -0.8% EBITDA), showed generally supportive market conditions, with the midpoint implying ~7.5% Adj Rev growth (ex dealer rebates) and 20% Adj EBITDA growth in 2H’21.

With domestic new car sales showing strong growth (increases used stock) and Korea seemingly travelling well despite a rise in COVID-19 cases, conditions remain supportive into FY22.

We have put through some reductions to estimates (~3-4% EBITDA reductions in FY22/23) around lower Encar growth (largely FX related) and minor domestic reductions.

With some valuation support now apparent and a robust earnings outlook, we move to an Add rating with a new price target

Our valuation/price target has increased 7% (login to view) with a DCF rollover/slight WACC reduction (+5.5%) and the TI acquisition (+4%) offsetting minor earnings downgrades (-2.5%).

With robust earnings growth forecast (15% EPS CAGR FY21-23) and CAR trading at a much lower premium to it’s 10yr historic trading averages than the other larger classifieds players, we see both relative and absolute value in CAR, moving to an Add rating.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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