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Auto Trader - COVID-19 help measures, full year to be as expected

Emilie Stevens, Equity Analyst | 19 March 2020 | A A A
Auto Trader - COVID-19 help measures, full year to be as expected

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Auto Trader Group plc Ordinary 1p

Sell: 658.60 | Buy: 659.40 | Change -5.60 (-0.84%)
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Auto Trader's announced measures to help customers in light of current uncertainty. Car dealerships will not be charged for their advertising packages in April and customers will be able to defer their March advertising cost for 30 days.

The group expects full year results to 31 March 2020 (announced June 4) to be broadly in line with market expectations. However, the measures to support customers will result in an operating loss of £6-7m in April. AutoTrader said it wasn't able to give sensible guidance for the next financial year given current market conditions.

At the end of February the group said it had £111m remaining of its credit facility and net debt was 1.1 times cash profits (EBITDA). Auto Trader will not buy back any more shares until after full year results.

The shares fell 13% in on the news.

View the latest Auto Trader share price and how to deal

Our View

Auto Trader is the UK's largest online car sales platform.

Being the biggest doesn't just sound impressive, it's a key competitive advantage. As the most popular platform for buyers, Auto Trader is indispensable for car dealers, and so can squeeze more money from its car-dealer 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.

The costs of running the website, already low as a percentage of sales, don't change all that much. So as sales grow margins follow suit and the group generates truckloads of cash.

However, coronavirus has the potential to really put a spanner in the works.

AutoTrader is going into the storm fighting fit, debts are within target range and they have access to credit if they need it. The cash generative and capital light nature of the business will help too. But the strain on its customers could be substantial.

It was already a tough time to be a car dealer, with Brexit uncertainty and, increased environmental concerns meaning we could be waving goodbye to petrol and diesel cars sooner rather than later. But coronavirus has amplified these woes.

AutoTrader's move to help customers will be welcome news to car dealers. But without clarity on how long this current state will last, whether this help is sustainable over a longer term remains to be seen. Conditions worsening is not good news for anyone and even if AutoTrader stumps up more cash to help, we could still see customers shutting up shop.

While this rumbles on, the groups longer term challenges, like the threat of disruption, remain. Even if they're not at the forefront of anyone's mind. Rumours that giants like Amazon may enter the market still linger.

Overall we think Auto Trader's dominant market position and business model puts it in a strong position. Cash protection measures like pausing the buyback plans will help too and while we've not heard anything yet - the dividend could face a similar fate if conditions worsen. For now the prospective yield is 2.2%. The shares currently change hands at 15 times expected earnings, which is significantly below their average rating since IPO of 23.

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Half year results (7 November 2019)

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.

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.

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