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Auto Trader: An Excellent First Year

George Salmon | 16 December 2016 | A A A
Auto Trader: An Excellent First Year

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Auto Trader Group plc Ordinary 1p

Sell: 716.00 | Buy: 716.40 | Change 0.80 (0.11%)
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Our View

The internet has transformed the way we buy used cars. Gone are the days of scouring through local newspapers and magazines before trudging around forecourts with a salesperson in tow. The browsing and research is now typically done online, and the trip to the forecourt is specifically to complete the deal. Nowadays, half of buyers visit only one dealer in their search for a car.

The online space is therefore crucial for dealers. This is where Auto Trader comes in. After selling its final print issue in 2013, the group is now fully online. The website connects buyers and sellers, who pay a regular fee for the ad space. The site attracts six times more website visits than its nearest competitor.

While there is clearly little growth to be had from signing up more vendors, don't let the group's high market share fool you into thinking that there is limited scope for growth. Auto Trader's dominant market position means dealers can't risk not being on the site, which gives the group that rarest of qualities: the power to push through price increases.

The group's average revenue per retailer forecourt (ARPR) per month has increased by 23% over the last two years. Growth in ARPR can come from price rises, more stock listings (the car market is buoyant at the moment) and retailers signing up for additional decision support packages.

The group's high margins and low capital requirements mean cash generation is strong. This has helped the group shed much of the debt it first had when listing in 2015. Net debt is now less than two times EBITDA (earnings before interest, tax, depreciation and amortisation) which has triggered a more generous shareholder returns policy to be adopted.

Auto Trader now expects to return around one third of net income as a dividend each year. So while the prospective yield is just 1.2% at present, analysts expect dividends to be more than 50% higher by 2020. The group has a rolling share buyback program in place too.

Despite the group's strengths, investors should be aware that the potential for economic uncertainty does threaten the UK's car market. While the second hand market could pick up some of the slack if the new car market weakens, Auto Trader would still be vulnerable in the event of a downturn.

Half year trading (10 November 2016):

Revenue increased by 11% to £153.9m. This increase, together with a 6 percentage point increase in operating margins (to 66%) helped operating profits up 23% to £102.3m.

The number of retailer forecourts advertised on the website fell by 1% to 13,374, but advert views per month increased by 4% to 250m.

Net external debt fell to £359.5m. This represents a leverage ratio of 1.8 times adjusted EBITDA (earnings before interest, tax, depreciation and amortisation).

Trevor Mather, group Chief Executive said: "Auto Trader, the UK's leading digital automotive marketplace, has delivered a strong first half performance. We have felt no discernible change in the competitive environment and no noticeable impact from Brexit to date... the Board is confident of delivering its growth expectations for the second half of the year."

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

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.