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Auto Trader - Dividends and profits rise

George Salmon | 8 June 2017 | A A A
Auto Trader - Dividends and profits rise

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Auto Trader Group plc Ordinary 1p

Sell: 658.20 | Buy: 658.40 | Change -6.80 (-1.02%)
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Auto Trader shares fell slightly after full year results. The results were marginally ahead of market expectations, although the number of retailers signed up to the website fell slightly more than had been expected.

Our View:

The internet has transformed the way we buy used cars. Gone are the days of scouring through classified ads 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 just to complete the deal. The online space is therefore crucial for dealers.

After selling its final print issue in 2013, Auto Trader is a fully online operation. The website connects buyers and sellers, who pay a regular fee for the ad space.

Recent indicators haven't been uniformly positive for the UK's car market. After a scramble to register new cars before April's hike in vehicle excise duty, new car sales now look reasonably likely to fall this year. This may not impact used car sales in the short term, but any decline will likely feed through over time.

On the face of it, consolidation within the UK's car dealerships is also a concern. However, while this does potentially mean fewer customers, Auto Trader long ago passed the point of being dependent on signing up more dealers for revenue growth.

The key factor is that the website is so popular with buyers that the dealers often can't risk not being listed. This gives Auto Trader that rarest of qualities: the power to push through price increases. As we've seen this year, growth in ARPR (average revenue per retailer forecourt) can also come from more stock listings and retailers signing up for additional data-focused sales packages.

Indeed, revenue has increased by over 30% in the last 3 years, despite the number of dealers on the books remaining bang flat.

With debts now well within the target range, the capital light business model should mean cash generation is healthy, and we'd expect any excess cash to be returned to shareholders through dividends or buybacks. While the prospective yield is just 1.4% at present, analysts expect dividends to be more than 50% higher by 2021.

Full year results:

Auto Trader's operating profit in the 12 months to 31 March 2017 was £203.1m, up 18% on the previous year. The increase was driven by a 9% increase in revenue, to £311m, and a 6 percentage point rise in operating margins, to 67%.

The group saw a 2% drop in the number of retailer forecourts advertising on the site, but Average Revenue Per Retailer (ARPR) from the 13,296 retailers still signed up rose £162 to £1,546 per month. This was boosted by more stock listings, higher prices and greater take up of smart products.

The website remains the most popular car-buying site in the UK, generating 55.4m hits per month (up 16%). This is 4 times the amount of the group's nearest competitor.

The final dividend is set to be 3.5p per share, taking the total for the year to 5.2p (2016: 1.5p). The dividend policy remains to pay out one third of net income as a dividend. The majority of the £128.7m returned to shareholders last year was through share buybacks, and the group says it will continue to allocate the majority of surplus cash, after dividends, to buybacks.

Net external debt fell by £37.6m to £355m. With profits rising, leverage, as measured by the ratio of net debt to earnings before interest, tax, depreciation and amortisation (EBITDA) fell from 2.2x to 1.6x.

The group expects the number of new car registrations to plateau or dip in the year ahead, amid rising wider economic uncertainly fuelled by the result of last year's EU Referendum. However, it continues to believe the used car market will remain strong in the short-term. Therefore, management is confident of delivering further growth in margins and ARPR next year.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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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