Learn To Invest
Stocks Special Reports LICs Credit Funds ETFs Tools SMSFs
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features SMSFs Learn
About

News

Upbeat Carsales result defies flagging auto sales

Glenn Freeman  |  19 Feb 2020Text size  Decrease  Increase  |  
Email to Friend

Carsales.com's latest result proves there's life in the auto sector yet, despite the death of General Motors' Holden brand earlier this week.

GM this week officially dropped the brand from its model line-up, marking the end of the road for the iconic Australian motoring marque. The General ceased Australian automotive manufacturing in 2012, at a time when its last factory in Adelaide was missing breakeven production levels of Holden cars by around 50 per cent.

The malaise is sector-wide for Australian automotive manufacturing: Ford and Mitsubishi also ceased local production in the preceding years.

But Carsales.com (ASX: CAR), which owns the dominant automotive trading platform in Australia, posted a 22 per cent profit increase last week. This prompted Morningstar equity analyst Gareth James to lift his fair value estimate by 9 per cent to $17.20 a share.

He pins this decision primarily on the company's earnings growth in Australia, despite weak sales of new cars, along with Carsales's earnings growth in its overseas operations.

Alongside its marquee carsales.com website in Australia, the company operates used car retailing websites SK Encar in South Korea and Webmotors in Brazil.

"We are also pleasantly surprised by the company's ability to create new products which are delivering organic revenue growth," says James.

"Considering the cash-generative and asset-light nature of the business, we expect the company to continue to have surplus capital to deploy."

What investors want

He highlights Carsales' delivery of "the things investors want", including:

  • Innovation
  • Organic revenue growth (not through buying businesses)
  • International expansion
  • "Clean" financial statements.

"We expect the market is finally recognising the strengths of the group, which has historically traded at a discount to peer companies REA Group (ASX: REA) and Seek.com (ASX: SEK) on the basis it is more vulnerable to competition," James says.

It's perhaps this newly-found recognition of the group's potential that saw the share price tick up 10 per cent immediately following management's announcement of the result last Wednesday.

After climbing to $19 a share a day after the result, from a pre-earnings price of $17.60, the share price has since settled to $18.54.

"We're not surprised carsales.com's share price rose by 8 per cent following the result," James says.

But he concedes the company continues to trade at elevated levels, currently 7 per cent above the $17.20 James says it's worth.

Advertising paid for by Australian car dealers comprises around one-third of group revenue. This performed well during the half, despite new car sales slumping by about 8 per cent.

James says this business unit's 6 per cent revenue growth fell below the prior full-year growth of 8 per cent. But this was offset slightly by the private advertiser market – individual Australians rather than automotive dealers – which makes up 20 per cent of Carsales' advertising sales segment.

This was even stronger, achieving 7 per cent revenue growth during the half, but still below the 12 per cent James was looking for.

But he's encouraged by the group's progress in building new revenue streams.

These include its Instant Offer product, a time-saving service that largely removes "tyre-kickers" from the process. Carsales quickly generates a fair price for the car, a representative inspects the vehicle and then organises collection and payment.

There’s also Virtual Garage, which creates an online profile helping car owners track their vehicle's market value, sends reminders of important dates such as warranty expiry and registration renewal, and links to offers on tyres, insurance and other partner deals.

Advertising in the firing line

Display advertising – 15 per cent of group revenue – bears the brunt of the new car sales downturn because it's linked directly to manufacturers' flagging advertising budgets.

But despite the weakness, James is encouraged by the division's ability to diversify its customer base beyond the automotive sector. This should reduce earnings volatility over the longer term.

He's also buoyed by the improved outlook for the housing market – a bellwether of Australian consumer household wealth, which directly influences purchases of big-ticket items such as new cars.

"It's also increasingly likely new car sales will rebound following the three interest rate cuts by the Reserve Bank of Australia in 2019 and the associated recent resurgence of the real estate market."

is senior editor for Morningstar Australia

Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar.

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

Email To Friend