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Auto Trader - revenue down, outlook uncertain

Sophie Lund-Yates, Equity Analyst | 5 November 2020 | A A A
Auto Trader - revenue down, outlook uncertain

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Auto Trader Group plc Ordinary 1p

Sell: 596.20 | Buy: 596.60 | Change -1.60 (-0.27%)
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Half year revenue of £118.2m was 37% below last year. That reflects a steep decline in average revenue per retailer in the first quarter, as Auto Trader suspended advertising fees for its customers during lockdown. Operating costs reduced at a slower rate, so operating profit fell 48% to £68.5m.

Following the announcement of a new lockdown in England, Auto Trader will once again make its advertising packages free for December, and will extend payment terms for a month for November services. The group said consumer demand has been strong since the initial lockdown ended.

The recent developments means Auto has decided not to pay an interim dividend.

The shares were unmoved following the announcement.

View the latest Auto Trader share price and how to deal

Our View

Auto Trader is the UK's largest online car sales platform. That's a key competitive advantage. As the most popular platform for buyers, Auto Trader is indispensable for car dealers, allowing it can squeeze more money from its customers through price rises and product developments.

The cost of running the website, already low as a percentage of sales, hasn't grown all that much with each extra user. So as sales have grown margins have followed suit and the group generated truckloads of cash.

However, the UK in lockdown poses a real challenge for Auto Trader and its customers.

Car dealerships were closed throughout the first lockdown and in response Auto Trader waived its fees. That's dented revenues, and history's going to repeat itself as fees are suspended for December, as England braces for lockdown 2.0.

Life for car dealerships was already relatively tough before the crisis. The UK car market was grappling with Brexit uncertainty, regulation and technological changes. Coronavirus has just added to the pressure and dealership numbers are likely to dip further, which is also a headwind for revenues.

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. Fortunately consumer demand bounced back strongly when the initial lockdown lifted in June and we would hope for a similar reaction when we emerge from the latest restrictions although of course there are no guarantees.

A reasonably healthy balance sheet adds to Auto's ability to withstand turbulence in the near term. Net debt is conservative and in April the group issued new shares which raised £183m in cash for the group to use if needed.

Overall we think Auto Trader's dominant market position, comfortable liquidity position and very flexible cost base means it has the tools to ride out the bumpy economic cycle. There are likely to be ups and downs from here though, as the net effect of the latest restrictions are yet to play out. A price to earnings ratio well above the average will make the shares sensitive to any upset.

Auto Trader key facts

  • Price/Earnings ratio: 31.7
  • Average Price/Earnings ratio since listing (2015): 23.8
  • Prospective dividend yield (next 12 months): 1.2%

All ratios are sourced from Refinitiv. 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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Half year results

The number of car dealerships fell 2% to 13,056. Average revenue per retailer (ARPR) fell £745 to £1,206 per month. The majority of this was related to the discounts offered in the first quarter. The number of cars being advertised on Auto Trader fell 1% to an average of 478,000. Three further software products were made available in the period.

The average number of visits to Auto Trader's platforms rose 12% to 57.3m per month. A 65% reduction in marketing spend means the vast majority of these visits came from customers coming direct, or organically searching Auto Trader. Around 80% of visits now come from a mobile device.

Trade revenue fell 38% to £100.2m, Services declined 19% to £12.9m, and the biggest fall came from Manufacturer & Agency sales. These fell 43% to £5.1m.

Operating costs fell 11% in the period, and operating margins were 58%, compared to 70% last year.

The group generated free cash flow of £47.9m, and net debt was £58.1m, which is equivalent to 0.3 times cash profits.

At 30 September 2020 the group had drawn £90m of its £400m unsecured Revolving Credit Facility, and had cash balances of £31m.

Looking ahead, Auto Trader said: "given the continued uncertainty surrounding COVID-19 and further customer support in December, it is difficult to provide sensible revenue guidance for the balance of the year." For the last month, audience volumes are higher than last year, and ARPR is flat compared to last year.

Find out more about Auto Trader shares including how to invest

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.