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Auto Trader - Revenues still ticking over

Nicholas Hyett | 9 November 2017 | A A A
Auto Trader - Revenues still ticking over

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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: 596.20 | Buy: 596.60 | Change -1.60 (-0.27%)
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Auto Trader shares were broadly unmoved after the group reported a 7% increase in revenues in the first half to £165m. Cash generation improved 11% to £114.2m.

The interim dividend rose 12% to 1.9p per share.

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. Industry forecasts suggest new car registrations will fall 5% this calendar year, while recent falls have been even more dramatic. 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.

As things stand, the key attraction is that the website is so popular with buyers that dealers 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.

Unfortunately, that market dominance could be under threat. Amazon has the power to smash through barriers to entry, and rumours have been circulating since the summer it's looking at launching a second hand car offer in a major European market. If that particular steamroller turns up in the UK market Auto Trader would be in for a lengthy and painful fight.

On the bright side, Auto Trader is in pretty good condition. Debts are well within the target range, and a capital light business model means its generating bucket loads of cash which are coming back to shareholders through dividends and share buybacks.

While the prospective yield is just 1.6% at present, analysts expect dividends to climb from here.

Half Year Results

Operating profits have improved 9% in the half, to £109.6m, with earnings per share up 14% to 8.72p, boosted by the share buyback scheme.

Average Revenue per Retailer (ARPR) per month rose £148 in the first half to £1,674. Auto Trader now expects the full year improvement in ARPR to be at or above £140pcm for the year, ahead of its original £130pcm target.

Growth is being driven by the sale of ancillary services to car dealers, although the group has also seen a 3% increase in cars listed on the site. However, the number of individual retailers listing cars on the site has fallen slightly, down 1%, with revenues from the small consumer business down 3%.

Operating costs rose 4% in the half, of which 2% relates to the acquisition of Motor Trade Delivery in April 2017. With sales growth outstripping cost increases, group operating margin rose one percentage point to 66%.

Net debt ended the period 2% lower than a year earlier, with at £347m. This implies leverage (net debt to EBITDA) of 1.55x. The group's capital allocation policy remains unchanged, with a third of full year income to be paid as dividends and any remaining surplus cash used to buy back shares.

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.