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Auto Trader announces strong first half

Charlie Huggins | 13 November 2015 | A A A
Auto Trader announces strong first half

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Auto Trader Group plc Ordinary 1p

Sell: 658.60 | Buy: 659.40 | Change -5.60 (-0.84%)
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Auto Trader, the operator of the UK's largest digital automotive marketplace, has announced half year results for the six months ended 27 September 2015. The group has had a strong start to its financial year, growing revenues by 8% to £138.2 million and underlying operating profit by 17% to £83.0 million. The market likes the results, with the shares up over 4% in early morning trading.

Auto Trader's customers are primarily vehicle retailers. On average around 13,503 automotive retailers chose to advertise on its website in the first half, broadly stable year-on-year.

Average Revenue Per Retailer Forecourt (ARPR) per month rose by 9% to £1,347, primarily due to a 5% rise in vehicle stock listings, reflecting both buoyancy in the market and retailers acknowledging the need to advertise more of their individual stock items online. Price increases were also driven by selling additional packages to retailers to help them with their buying and pricing decisions.

Average monthly cross platform visits increased to 43m (H1 2015: 41.6m), which is in excess of five times more than the nearest competitor. Advert views increased by 9%.

Auto Trader is highly cash generative. Operating cash flow of £86.0 million (H1 2015: £58.8 million), represented a cash conversion of 97%, enabling a reduction in leverage to 2.7x (March 2015: 3.4x). A maiden interim dividend of 0.5 pence per share was declared, to be paid in January 2016.

Auto Trader is confident of meeting full year expectations. Trevor Mather, CEO, commented: "We believe there is substantial opportunity to grow the business based on the increasing importance of the internet for automotive advertising, and the growing use of data to improve the efficiency and effectiveness of the industry."

Our View

The internet has transformed the way we buy used cars. The days of having to trudge around forecourts, trying your best to avoid the sales man are becoming a thing of the past. Nowadays, most consumers buy a car from the first forecourt they visit, having already made their buying decision online.

Auto Trader owns the leading online auto marketplace in the UK and Ireland. The majority of revenues come from car retailers who pay to advertise cars on its site, in a similar way that estate agents pay to list their properties on sites like Rightmove.

The group benefits from a dominant market position, reinforced by a long established brand name (the print magazine was founded in 1977, with the business becoming 100% digital in 2013 ). The site attracts 43 million monthly cross platform visits, five times more than its nearest competitor. Over 80% of all time spent on automotive classified sites is spent on Auto Trader.

Given Auto Trader's high market share, there is limited scope to sign up more retailers. However, there is plenty of opportunity to get them to spend more. Growth in Average Revenue per Retailer Forecourt (ARPR) can come from price rises, more stock listings (the used car market is buoyant currently) and encouraging retailers to sign up for additional decision support packages.

Auto Trader does have around £450m of debt, but it is rapidly deleveraging, reflecting its very strong cash flows and low capital requirements. Leverage stood at 2.7x at the half year stage, down from 3.4x in March 2015, and should quickly fall towards the group's 2x target. After that, Auto Trader expects to be able to make significant cash returns to its shareholders. The appointment of David Keens, the former Finance Director of Next as the senior non-exec suggests to us they are serious when they say that.

The shares trade on a higher than average price to earnings (PE) rating, with a current year forecast PE ratio of 33x , according to Bloomberg, which is broadly in line with that of Rightmove. But both companies have very strong business models, in our view, which could be well placed to benefit from the on-going shift to digital advertising.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.

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