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Auto Trader - a solid year in a tough market

Emilie Stevens, Equity Analyst | 25 June 2020 | A A A
Auto Trader - a solid year in a tough market

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Auto Trader Group plc Ordinary 1p

Sell: 658.20 | Buy: 658.40 | Change -6.80 (-1.02%)
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Full year revenue rose 4% to £368.9m, driven by higher car dealership revenues. Operating costs stayed relatively flat, and operating profit rose 6% to £258.9m.

Auto Trader expects to finish the first quarter of the year in a profitable position, despite being loss making in April and May, with car dealerships now reopening having been closed over lockdown.

Since reopening on June 1, the group said demand has been high. Any stock levels built up over lockdown have now been eroded and as a result used car prices have remained stable. Auto trader expects this to continue to be the case from July onwards. The group will return to full pricing for dealerships on July 1.

As previously guided the group won't be paying a final dividend, leaving the total dividend for the year at 2.4p (2019: 6.7p).

The shares fell 1.8% on the news.

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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 a real challenge for Auto Trader and its customers.

Car dealerships were closed throughout lockdown and in response Auto Trader wasn't charging them. That's meant two loss making months for the group, which will dent this year's performance. But with dealerships now reopening and demand said to be strong, lockdown could end up being more of a bump in the road.

It won't all be plain sailing though. Life for car dealerships was already relatively tough before the crisis. The UK car market was grappling with Brexit uncertainty, regulation and environmental changes. Coronavirus has just added to the pressure. And while dealerships have reopened to a buoyant market, , we wonder whether a new car will be a priority for many as the UK is weaned off its furlough lifeline and unemployment rises. We expect dealership numbers to drop further.

Longer term there are reasons for optimism. Auto Trader continues to show it's an able cross seller and this year has shown that more customers using premium products is good news for earnings. Coronavirus means public transport is out of favour for now, which could end up being good news for car ownership. But we'll need to wait to see how that pans out.

Auto Trader's balance sheet adds to its resilience to withstand any turbulence in the near term. Net debt is roughly equal to cash profits. And in April the group issued new shares which raised £183m in cash for the group to use if needed. It's important to remember the role that Auto Trader's cash generative and capital light business model also plays.

Overall we think Auto Trader's dominant market position and business model puts it in a strong position. While the group has shown it's resilience over lockdown, as the wider economic impact of the crisis unfolds resilience is something it'll have to keep proving. For now we see no reason why it shouldn't.

Auto Trader key facts

  • P/E 31.9
  • 10 year average P/E 23.29
  • Prospective yield 1.1

We've introduced this section in response to recent survey feedback - email us to let us know what you think. Please don't include any sensitive information, like account details.

Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Full Year Results

Revenue from car dealerships rose 7% in the year to £312.1m with average revenue per retailer forecourt (ARPR) up to £1,949 per month (2019: £1,844).

ARPR has 3 levers: price, stock levels and product. Of this year's £105 increase in ARPR, new product developments contributed £82 and higher prices £53. These increases offset the impact of lower dealership stock levels, which reduced ARPR by £30. Overall the number of cars advertised on the site rose 4%, which was driven by new, private and home trader customers.

Over the year the number of dealerships nudged up 1% to 13, 345. Since the start of the new financial year the number of dealerships has declined by 3%, although this was a better performance than the previous years.

Revenue from home traders was £8.3m while the Services and Manufacturer & Agency sales divisions contributed £28.3m and £16.3m respectively. Other revenue was £3.9m.

Higher profitability helped operating cash rise 3% to £265.5m. Despite having acquired auto software company Kee Resources for £25.3m, net debt finished £38.6m lower at £282.4m.

In response to coronavirus disruption, Auto Trader took a number of measures to strengthen its balance sheet after the financial year end. In April it raised £183.2m in cash from an equity placing and it recently extended the term on its £316.5m RCF facility by a further year - delaying repayment.

Auto Trader said the UK car market continues to be challenging, due to Brexit uncertainty and environmental and technological changes. New car registrations declined 10.9% in the year, but that largely reflects the impact of March's lockdown. The total number of transactions for the year fell 4.3% to 9.8m, 7.7m were used car transactions, which is a 2.3% decline on the year before. Average car prices on Auto Trader dipped 0.5% in the year, driven by diesel vehicles.

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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