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Auto Trader - good end to the year, uncertainty mounts

Full year revenue rose 65% to £432.7m compared to last year, reflecting the non-repeat of advertising fee-breaks...

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Full year revenue rose 65% to £432.7m compared to last year, reflecting the non-repeat of advertising fee-breaks for customers. Compared to pre-pandemic levels, revenue's up 17%.

Operating profit rose 88% year-on-year to £303.6m, as higher costs were offset by the increased revenue.

Auto Trader said, 'despite growing economic uncertainty, the Board is confident of meeting its growth expectations for the year.'

A final dividend of 5.5p was announced, taking the full year payment to 8.2p.

The shares rose 2.3% following the announcement.

View the latest Auto Trader share price and how to deal

Our view

There's a multitude of motoring puns we could use to describe Auto Trader, but we'll go with on the right track.

One major reason for that is its scale.

Auto Trader is the UK's largest online car sales platform. It's a digital marketplace where individuals, or more often, car dealerships can advertise and sell cars. That means Auto Trader doesn't hold any car stocks itself, and the ups and downs of car prices don't directly affect it.

As the most popular platform for buyers, car dealers are prepared to swallow price increases for advertising on Auto Trader, and they're also more likely to pay for more expensive (read: more lucrative) marketing packages.

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

Of course, the pandemic was still a challenge.

Forecourts were forced to close because of the pandemic, and Auto Trader responded to the tough conditions by offering its customers ad fee breaks and reductions. The right thing to do for long-term customer loyalty, but not good for revenue and profits.

Life for car dealerships was already relatively tough before the crisis. The UK car market was grappling with Brexit uncertainty, regulation and technological changes. This means the number of dealerships is likely to dip in the medium term. Fewer dealerships mean fewer Auto Trader customers.

Crucially though, car demand is holding up well. Demand for new cars is outstripping supply at the moment, pushing up prices of used cars. That may not feed through to Auto Trader's results directly, but it will be a relief for dealerships. That should help sales of more lucrative ad packages. Pushing up average revenue per retailer takes some of the pressure off declining forecourt numbers.

The other positive is the group's efforts to double-down on services, boosted by acquisitions last year. The pandemic has accelerated the shift to online, and Auto Trader has an opportunity to grab an even bigger piece of the pie here by offering car finance options on the site. This is also behind the latest acquisition of Autorama, a marketplace for leasing vehicles. As the cost of used cars is still high, being able to offer leasing deals is a shrewd move. We have high expectations though as we view the price paid for the company pretty steep. Auto Trader's healthy balance sheet is what gives it the fire power to invest in new opportunities.

Auto Trader's dominant market share and low cost base means it has the tools to ride out several difficult challenges. In the medium term the group has to navigate forecourt closures though - and it could still misfire.

Auto Trader key facts

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.

Full year results

Average revenue per retailer (ARPR) increased £886 to £2,210 per month. Ignoring the effect of Covid-related discounts, ARPR increased £247m, with growth coming from price increases, the adoption of more expensive products and favourable stock movements. There was a 5% increase in the number of forecourts advertising on Auto Trader's site, reflecting fewer cancellations. There are 13,964 forecourts currently advertising with Auto Trader.

Trade and Consumer Services revenue, the two biggest divisions, rose 72% and 25% respectively, to £388.3m and £33.3m.

The group commented on increased used car prices, which are having a positive effect for some of its customers' profits. It also noted that new car registrations are 22% below 2020 levels, reflecting the well-known issues with semi-conductor supply.

The average monthly cross platform visits are up 9% to 63.8m per month, and engagement (measured by the number of minutes spent on the website) rose 5%.

There was a 27% increase in costs, including marketing spend which more than doubled. Operating margins rose from 61% to 70%, and the group generated free cash flow of £269.1m. As at 31 March 2022 the group had net cash of £41.7m.

Looking ahead, the group said: 'We are anticipating another good year of ARPR growth, underpinned by our product lever. We expect growth in the product lever to be greater than 2021, but less than the exceptional performance achieved in 2022. We expect the price lever to be broadly consistent with last year, and the stock lever to be flat. We anticipate average retailer forecourts to be marginally down year-on-year, as market conditions start to toughen.'

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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 disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 26th May 2022