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Auto Trader - growth slower, but still fuel in the tank

Nicholas Hyett | 8 November 2018 | A A A
Auto Trader - growth slower, but still fuel in the tank

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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: 588.00 | Buy: 588.40 | Change -4.20 (-0.71%)
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Auto Trader's half year revenue rose 7% to £176.8m, thanks to improvements in Average Revenue Per Retailer (ARPR). That supported an improved operating margin, with operating profit up 10% at £120m.

The shares rose 3.7% on the news.

The interim dividend rises 10.5% to 2.1p per share.

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Our View

After selling its final print issue in 2013, Auto Trader is a fully digital operation.

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.

Recent indicators haven't been uniformly positive for the UK's car market. Both used and new car sales are falling, and Auto Trader thinks the trend will continue.

Even big names are struggling. Pendragon, one of the UK's biggest car dealers, announced a profit warning in October after a slump in sales worsened. That's a worry because Auto Trader charges dealers a monthly fee based on their number of active forecourts, if conditions worsen some might find themselves shutting up shop.

That said Auto Trader isn't completely dependent on the number of dealerships using its platform, the group's long past being dependent on signing up more dealers for revenue growth. It's by far the most popular used car site, so dealers can't risk not being listed on it. This gives Auto Trader that rarest of qualities: the power to push through price increases.

Recent results have proven that growth in ARPR (average revenue per retailer forecourt) can come from more stock listings and/or retailers signing up for additional data-focused sales packages.

Running the website doesn't require much investment, meaning the group generates high margins and bucket loads of cash. With debts well within the target range, much of this coming back to shareholders through dividends and share buybacks.

The prospective yield is just 1.5% at present, but analysts expect dividends to climb from here.

Our worry is that while Auto Trader has a great market position now, its dominance could come under threat. Amazon has the power to smash through barriers to entry, and rumours have been circulating it's considering launching a second hand car offer in a major European market. If that particular steamroller turns up in the UK, Auto Trader would be in for a fight.

However, until any challenge materialises, we'll continue to think Auto Trader has plenty to offer.

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Trading details

Trade revenue, which comprises revenue from Retailers, Home Traders and logistics customers, rose 8% to £150.1m.

Retailer revenue grew by 9%, to £144.1m. The average number of retailer forecourts remained stable at 13,153, with ARPR growing 9% to £1,826 per month. The £152 increase was driven by new products and price growth, slightly offset by an anticipated decline in stock.

Operating cash flows rose 12% to £129m, although overall costs increased 2% to £56.2m following an increase in administrative spending.

At £319.4m, net debt stands at 1.3 times earnings before interest, tax, depreciation and amortisation, which is a slightly down from last year.

The number of cars on the platform decreased 3% due to reduced supply of younger vehicles across the industry.

Total cash returned to shareholders in the period was £80.8m, which includes a £42.9m buyback.

Find out more about Auto Trader shares including how to invest

The author holds shares in Auto Trader.

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.

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.