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Auto Trader - driving profit and dividends up

George Salmon | 6 June 2019 | A A A
Auto Trader - driving profit and dividends up

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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: 658.20 | Buy: 658.40 | Change -6.80 (-1.02%)
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Auto Trader's full year revenue rose 8% to £355.1m. With costs up just 3%, operating margins improved from 67% to 69%, leading operating profit up 10% to £243.7m.

The final dividend of 4.6p is a 15% increase on last year.

The shares were unmoved following the announcement.

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Our View

When you think of Auto Trader, you might think "magazine" before "website". But the way we buy cars has changed, and Auto Trader has changed with the times. The print editions are no more, and the group now makes its money by being the UK's largest online car sales platform.

Being the biggest doesn't just sound impressive, it's very good for business. As the most popular platform for buyers, Auto Trader becomes indispensable for car dealers, and so can squeeze more money from its existing customers. In addition to raising prices, Auto Trader has kept ahead of the curve by developing and monetising new products such as extra analytics services.

And as Auto Trader has increased revenues, the costs of running the website, already low as a percentage of sales, haven't increased that much. Therefore margins are high and the group generates lots of cash.

Debts are within the target range, so that excess cash has been returned to shareholders through buybacks and dividends. The prospective yield is quite modest at 1.3%, but analysts expect this to rise over the coming years. As ever though, there are no guarantees.

The road isn't totally clear though. A drop in demand for diesel cars is hurting the car industry, and Pendragon, one of the UK's biggest car dealers, reported a loss in its first quarter. That's a worry because Auto Trader charges dealers a monthly fee based on their number of active forecourts, and if conditions worsen some might find themselves shutting up shop.

Added into the mix, the group's CEO, Trevor Mather, is leaving next March after six years. Successor, Nathan Coe, the current CFO and COO, will need to keep Auto Trader ahead of the curve. Especially if the rumours that giants like Amazon are looking at motoring into Auto Trader's space prove correct.

Overall, while there are some clouds on the horizon, Auto Trader's dominant market position and attractive business model means we think it could still have a lot to offer. The shares currently change hands at 25.8 times expected earnings, which is around 10% above their average rating since their 2015 IPO.

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Full year results

Despite the number of forecourts remaining stable at 13,240, revenue from car dealerships rose 9% to £293m as higher prices and the sale of higher value advertising packages helped Average Revenue Per Retailer forecourt, per month (ARPR) improve to £1,844.

Revenue from private and other sellers was £11.6m, while the Services and Manufacturer & Agency sales divisions contributed £28m and £22.5m respectively.

The group's higher profitability helped operating cash flows rise 13% to £258.5m. And with just £1.7m spent on capital expenditure, Auto Trader was able to return £151.1m to shareholders through a combination of buybacks and dividends, and reduce net external debt by 9% to £313m. That represents a debt to adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) ratio of 1.2.

Auto Trader says both the new and used car markets declined over the year but pricing remains buoyant. The prices of comparable diesel, petrol and alternatively fuelled cars all rose.

Looking ahead, the group expects another strong year of ARPR growth, underpinned by upselling. However, that growth is not expected to be as strong as 2019 as stock levels are likely to drop in line with market trends and the 'exceptional' growth from higher value products is unlikely to be repeated.

Find out more about Auto Trader shares including how to invest

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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