Auto Trader Group plc (AUTO) Ordinary Shares 1p
HL comment (22 March 2022)
Auto Trader has agreed to buy Autorama, one of the UK's biggest marketplaces for leasing new vehicles. The platform compiles leasing deals from multiple sources, allowing customers to choose from a wide range.
Auto Trader said: "The acquisition will transform Auto Trader's existing leasing proposition and help to meet the demands of the growing number of consumers who might consider leasing their next new vehicle. In time, it will enable Autorama to leverage Auto Trader's brand to accelerate its recent expansion, beyond light commercial vehicles, into leasing new cars."
The deal is subject to regulatory approval. If it goes ahead, Auto Trader will pay an initial £150m in cash, with a further £50m paid in shares possible, depending on performance.
The shares were unmoved following the announcement.
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 last year 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
- Price/earnings ratio: 24.5
- Average Price/earnings ratio since listing: 24.4
- Prospective dividend yield (next 12 months): 1.4%
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.
Half year results (11 November 2021)
Auto Trader has achieved its highest ever half year revenue and profits. Revenue rose 82% to £215.4m, and was 15% above pre-pandemic levels. Revenue was helped by the fact Auto Trader reduced advertising fees for customers during the pandemic, but this is no longer happening. The group's also enjoyed the benefits of higher consumer engagement, customer numbers, and good uptake of more lucrative advertising packages.
Operating profit of £151.7m more than doubled compared to last year, with margins rising from 58% to 70%.
The group declared an interim dividend of 2.7p, compared to no dividend this time last year.
Average revenue per retailer (ARPR) was £2,199 per month, up £993 on last year. Excluding the effect of the Covid-related discounts, ARPR rose £353. Price increases contributed £74 to the increase, while the adoption of more expensive advertising packaging products made up £119.
The average monthly cross platform visits rose 20% in the period to 68.7m, and people are spending longer on the site than they used to. The average number of retailer forecourts advertising on Auto Trader's website rose 6% to 13,892. The increase reflects lower levels of cancellation because of better market conditions.
The group noted that UK new car registrations are still 23% lower than before the pandemic, largely because of semiconductor shortages impacting supply. This has lowered new car sales, and pushed the price of used cars up.
The two biggest divisions, Retailer and Trade, saw revenue rise 94% to £183.3m and 92% to £192.3m respectively.
A resumption of more normal marketing spending meant administrative costs, including staff, rose 29% to £65.4m. Auto Trader generated free cash flow of just under £140m, and had net cash of £9.2m.
The group said: ''For the full year, we now expect modest year on year growth in retailer forecourt numbers and low double-digit ARPR growth on FY20 levels. The stock lever, which shows the year on year movement, is likely to represent a small headwind for the full year, as we lap a strong second half last year.''
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 disclosure for more information.
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