Carsales.com: Momentum should carry over into 2H22

About the author:

Steven Sassine
Author name:
By Steven Sassine
Job title:
Associate Analyst
Date posted:
15 February 2022, 9:45 AM
Sectors Covered:
Diversified Financials

  • Carsales (CAR) reported a 1H22 topline result that was ~6% ahead of consensus (Adj. revenue A$242m, +16% on pcp), Adj. EBITDA of A$127m (+1% on 1H21, +7% ex wage subsidies in the pcp) and Adj. NPAT of ~A$89m (+20% on pcp). CAR declared a 25.5cps interim dividend (81% payout).
  • It was a commendable performance overall from CAR, with strong underlying growth seen in the core Private business with Encar and TI likely to maintain CAR’s momentum into the 2H.
  • We make nominal changes to our FY22F/FY23F/FY24F EBITDA forecasts (-0.2% to -2%) on slightly revised topline growth and margin assumptions near term. Our DCF-derived price target is marginally lowered (Morgans client login to view) on the above changes. We remain attracted to CAR’s longer term growth opportunities and business resilience and continue to look for an attractive entry point into the name. Hold maintained.

A commendable 1H performance

CAR reported a 1H22 topline result that was ~6% ahead of consensus at the top line with Adjusted revenue up 16% on pcp to A$242m. Adjusted EBITDA appeared broadly in line being up 1% on 1H21 (+7% ex wage subsidies in the pcp) to A$127m. Adjusted NPAT of ~A$89m was +20% on pcp. CAR declared a 25.5cps interim dividend (81% payout).

It was a commendable 1H22 performance from CAR, in our view, with strong revenue performances in the core Private division (+38% on pcp) and Encar (+19% on pcp – constant currency basis) the highlight.

What we liked in the result and things to monitor

A strong Private revenue performance (~A$31m, +38% on pcp) was driven by elevated volumes, instant offer and CAR's dynamic pricing strategy (+20% yield increase on pcp). Dealer, however, was impacted by low inventory levels and the extended lockdowns on the East Coast (revenue ~A$86m, +1% on pcp).

Encar's +16% revenue growth (~A$45m) was underpinned by a growing online trade-in market and increased market share in Dealer Direct (+100% revenue growth on pcp). The Guarantee product is also performing well (+30% revenue growth on pcp) on the back of an expanded branch network (+3 sites added), with Guarantee inspections now representing ~37% of Encar inventory.

Trader Interactive (TI, now ~33% of CAR's look-through revenue) had a solid overall result despite continued inventory issues in Trucks (-25% inventory growth). Revenue was up 12% on a constant currency basis, with +19% EBITDA growth (margin +~340bps to 57.1% on improved op. leverage). The 2H22 performance is likely to be buoyed by an average yield uplift of ~8% (ex Trucks, implemented March/April).

The 1H22 EBITDA margin (ex acquisitions) of 54.7% was down 180bps on pcp, with the main drivers of this contraction being a $4.7m investment in Dealer Direct marketing for Encar, the investment in Placie, lockdown impacts on the Tyres businesses (carsales investments) and continuing inventory issues across Chile/Mexico.

Changes to forecasts and Investment view

We make nominal changes to our FY22F/FY23/FY24 EBITDA forecasts (-0.2% to ~-2%) on slightly revised topline and margin assumptions over the near term. Our DCF derived price target is marginally lowered (Morgans clients login to view target price) on the above changes.

We believe CAR is continuing to lay the foundations for longer term growth, both within Australia and internationally, whilst fortifying the moat around its business by enabling dealers to bring most of the transaction online. We remain attracted to the long term growth opportunity of CAR and continue to look for an attractive entry point into the name. Hold maintained.

Risks

Upside risks include new product adoption ahead of expectations and international businesses ramping up growth out of COVID sooner than forecast.

Downside risks include competing business models (auto e-commerce), general valuation risks of growth stocks and general execution risks in building out offshore.

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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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