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Auto Trader - full year in line but dividend unlikely

Emilie Stevens, Equity Analyst | 1 April 2020 | A A A
Auto Trader - full year in line but dividend unlikely

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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: 553.60 | Buy: 554.40 | Change 11.80 (2.16%)
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Results for the year to 31 March 2020 will be broadly in line with market expectations, however there may be provisions included for post year end coronavirus impacts. At this stage Auto Trader cannot give guidance for the next financial year.

No decision has been made regarding the final dividend for FY20, although Auto Trader says if the current environment persists, it's unlikely one will be declared.

Amongst other measures to strengthen the balance sheet, Auto Trader announced intentions to raise additional capital through a share placing. That will see new ordinary shares, representing around 5% of current share capital, offered to selected institutional investors to buy. The placing went live this morning and was met with sufficient interest from investors.

The shares fell 7.7% in early trading.

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, so it can squeeze more money from its customers - through price rises and product developments.

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

However, with the UK now in lock down for the foreseeable future and the question of a recession becoming more about 'how long' not 'if' - the strain on Auto Trader and its customers could be substantial.

Auto Trader's move to make advertising free to car dealerships in April was a hit - with record car numbers displayed online. But whether this help is sustainable over a longer term remains to be seen. If the disruption is prolonged, even if Auto Trader stumps up more cash, we could still see customers shutting up shop.

The group is going into the storm fit - with debts within target range and access to credit if they need it. Importantly the group is well within its bank lending limits with net debt to cash profits at 1.1 times. The cash generative and capital light business model will help too.

While the move to raise cash by issuing new shares will add to the buffer, shareholders are likely to feel disgruntled. Auto Trader's been quick to transition from giving to taking - with an expensive buyback programme shelved, and replaced with selling cheap shares. We expect we're not the only ones sceptical of whether buying back shares was a good use of cash in the first place.

While this rumbles on, the groups longer term challenges, like the threat of disruption and rising environmental concerns, 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 to weather the storm. But with the depth and duration of the pandemic still unclear, the true impact on Auto Trader and its customers remains largely unknown.

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Coronavirus update

Auto Trader's move to make advertising free to car dealerships in April contributed to a record number of vehicles being displayed on its website - 540,000 at the end of March versus 480,000 at the same time last year. Following the UK lockdown being introduced, car dealerships are now closed for the purposes of buying / selling cars.

Cost saving measures have been put in place, with most discretionary spending removed, including marketing. The Board will forego at least half of their salaries or fees for the foreseeable future and executive directors have waived their annual bonus. Auto Trader's announced a furlough programme to employees, and it intends to top up the majority of the salaries that are impacted.

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's lenders have two key conditions. One is that net debt to headline cash profits ratio does not exceed 3.5 times. Secondly, the last 12 months of cash profits must be at least 3 times the group's net interest expense. These conditions are tested in March and September. Auto Trader expects to meet both tests.

Net debt to cash profits will rise towards September, because of the free services being offered.

Auto Trader will not buy back any more shares until after full year results.

The release of full year results will be delayed but a new date is yet to be announced.

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 disclosure for more information.