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Auto Trader - premium products boost profits

Nicholas Hyett | 7 November 2019 | A A A
Auto Trader - premium products boost profits

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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: 593.60 | Buy: 594.00 | Change -17.40 (-2.85%)
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Half year operating profits increased 9% to £131.4m, driven by a 6% increase in revenue to £186.7m.

Auto Trader increased the interim dividend 14% to 2.4p.

Buoyed by the news, the shares rose 8.1% in early trading.

View the latest Auto Trader share price and how to deal

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 as 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. Margins are high as a result 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 1.5%, but analysts expect this to rise over the coming years - although there are never any guarantees.

The road isn't totally clear though. Brexit continues to put people off buying big-ticket items, new and used cars included. Meanwhile environmental concerns mean regulators and consumers alike are taking an increasingly dim view of diesel and petrol cars. It's a tricky time to be a car dealer. 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.

Against that background it's not a great time for CEO Trevor Mather to look to the exit after six years in charge. 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 we think Auto Trader's dominant market position and attractive business model means we think it could still have a lot to offer, even if there are some dark clouds on the horizon. The shares currently change hands at 22.9 times expected earnings, which is just below their average rating since their 2015 IPO.

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Half year results

Over the last six months Auto Trader said both new and used car markets continue to be impacted by Brexit as customers delay big ticket purchases.

Retail revenue from car dealerships rose 8% in the half to £155.9m, driven by a higher uptake in premium products and increased prices. However, Average Revenue Per Retailer forecourt, per month (ARPR) rose just £149 to £1,844 as the group added smaller retailers. The total number of forecourts rose slightly to 13,316.

In the other areas, Home trader revenue fell 9% to £4.9m, driven by lower levels of used vehicle trading and clients migrating to the Retailer package. Consumer services saw revenues rise 5% to £15.9m, driven by increased private listings on Auto Trader. Revenues from Manufacturer & Agency clients fell 22% to £9m amid increased Brexit and regulatory uncertainty.

Auto Trader's costs rose 2% over the period as higher marketing and IT costs offset a slight decline in staff costs.

Operating cash flows rose 2.9% to £132.7m. The group returned £69.8m to shareholders through a combination of dividends and share buybacks.

Auto Trader finished the half with net debt of £294.6m, down slightly on year earlier.

Since the end of the reporting period Auto Trader has acquired KeeResources, a specialist automotive software company, for £25.3m.

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.