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Auto Trader - dealerships in England to open, charging resumes

Emilie Stevens, Equity Analyst | 27 May 2020 | A A A
Auto Trader - dealerships in England to open, charging resumes

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Auto Trader Group plc Ordinary 1p

Sell: 595.40 | Buy: 595.80 | Change -2.40 (-0.40%)
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Following the latest UK government guidance, car dealerships in England can reopen from 1 June. Auto Trader will resume charging these car dealerships in June, but at a 25% discount.

The group hadn't charged dealerships over the crisis in April or May. Charges for customers in the rest of the UK will be decided when their respective governments make new announcements.

Auto Trader said market place data and customer research suggests "healthy levels of demand".

The shares rose 1% 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, 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, the UK in lockdown posed real challenges for Auto Trader and its customers.

Car dealerships have been closed throughout lockdown and while that's been the case Auto Trader's not been charging them. News that dealerships in England can reopen in June is an important step. But they reopen to a much weaker economy, with many still furloughed and unemployment rising. Auto Trader said demand is "healthy", but we're sceptical whether a new car will be a priority for many now. So while Auto Trader is on the road to recovery it's unlikely to be a fast start.

That's why it's important the group went into the crisis in good shape. Debts were within the target range and the group has access to credit if they need it. Importantly, the group was well within its bank lending limits with net debt to cash profits at 1.1 times on 1 April this year. The cash generative and capital light business model will help too.

At the beginning of April Auto Trader raised more cash by issuing new shares. While an extra £186m adds to the group's resilience it's a move that likely disgruntled shareholders. Auto Trader was quick to transition from giving to taking, shelving and replacing an expensive buyback programme and selling cheap shares. We're probably not the only ones sceptical of whether buying back shares was a good use of cash in the first place.

As this all 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 minds just now.

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 economic impact of the pandemic so far not pretty and still unclear longer term, the outlook for Auto Trader and its customers is similar.

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Coronavirus update (1 April 2020)

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.

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 for 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 for more information.