Trusting the process

About the author:

Steven Sassine
Author name:
By Steven Sassine
Job title:
Associate Analyst
Date posted:
29 June 2022, 9:30 AM
Sectors Covered:
Diversified Financials

  • (ASX:CAR) announced it has exercised its call option to acquire the remaining 51% that it did not own of U.S. based Trader Interactive (TI), funded via an accompanied equity raise. The ~A$1.2bn purchase price equates to ~21.3x 4Q22 annualised EBITDA (somewhat full in our view) and is expected to complete in late 1Q23. Post completion, CAR will have a still palatable 2.7x ND/EBITDA (expected to get under 2.0x in a couple of years).
  • A FY22 trading update was also provided, with revenue (+16% on pcp), EBITDA (+6%-7% on pcp) and NPAT (+27%-28%) growth broadly in line with our estimates.
  • We make minor adjustments to our FY22 forecasts factoring in the trading update. We alter our FY23F/FY24F EPS by +2%/-3% on the acquisition and the associated equity raise. Our DCF-derived price target is lowered to (login to view) on the above changes. Hold maintained.

Bringing it all in

CAR announced it has exercised its call option to acquire the remaining 51% of TI for US$809m (~A$1.2bn), valuing TI on a 100% EV basis of US$1.9bn (~A$2.75bn). This represents an annualised 4Q22 EBITDA of 21.3x (~20% premium to current CAR multiple, MorgansE).

The initial 49% stake was purchased at 26.5x trailing EBITDA, a ~25% premium to CAR’s comparative multiple at the time. The acquisition itself is expected to complete by late 1Q23.

On a pro forma historical basis, the deal itself is mid-single digit EPS accretive; however, we note this relies on positive tax impacts (acquired intangibles) and other offsetting items in the near term.

The nuts and bolts – trusting the process

The transaction is to be funded via a ~A$1.2bn equity raise ($17.75, 14.5% discount to previous close). Post completion, CAR is expected to have a pro forma group ND/EBITDA of ~2.7x and is expected to fall to under 2.0x within the next two years (management is confident they can deleverage quickly as shown with Encar previously).

Whilst the multiple paid is quite full in our view (given CAR’s current ~18x multiple), the strategic rationale behind bringing the remaining 51% of TI inhouse appears sound.

This includes:

  1. The large TAM in U.S. non-auto (16x Aus. non-auto and 2x Aus. auto), with TI being market leaders in both RV and powersports.
  2. The strong recent growth in the business, with EBITDA (4Q22 annualised) up 82% on pre-pandemic FY19.
  3. Substantial dealer penetration still possible with increased monetisation opportunities.
  4. Revenue diversification via porting across CAR’s product suite (e.g. digital trade-ins, dynamic pricing, etc.) and ramping up media advertising.

CAR management has shown an ability to successfully build out in a digitally immature market and gain market leading positions (e.g. Encar). This, accompanied with TI being already in the CAR stable/familiarity with the business, gives us confidence growth can be maintained over the medium term.

FY22 trading update broadly in line

CAR had also provided a trading update, with most headline numbers broadly in line with MorgansE. Adjusted revenue is expected to be A$507m-A$509m (+16% on pcp); Adjusted EBITDA of A$270-272m (+6-7% on pcp); and NPAT of A$194m-A$196m (+27%-28%).

Update commentary flagged the domestic business as showing continued “healthy levels” of demand and increased adoption of growth products. Internationally, the Guarantee product and dealer direct volumes in Korea were said to have grown strongly and are expected to continue into FY23.

Changes to forecasts and investment view

We make minor adjustments to our FY22 forecasts factoring in the trading update. We alter our FY23F/FY24F EPS by +2%/-3% on the acquisition and the associated equity raise. Our price target is lowered to (login to view). Hold maintained.

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.

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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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