An acquisitive year for Carsales.com disguised the steady underlying growth in the existing businesses. There’s plenty to like about the company, but the share price already reflects this, in our view.
CAR reported an adjusted net profit of $194.2 million in FY22, an increase of 27%. The Board declared a fully franked final dividend of 24.5cps, a payout ratio of 81%. Earnings were boosted by the inclusion of Trader Interactive (TI) from September last year. CAR exercised its option to acquire the remaining 51% of TI in June for US$809 million (~A$1,172m) funded by a A$1.2 billion equity raise and a new debt facility.
The core Australian business is performing well. New product initiatives like Instant Offer are finding keen interest with consumers who want a convenient online means of quickly selling a vehicle. CAR said it had reached 3,000 such transactions in June and this adds another avenue of growth. Australia core revenue was up 9.2% in FY22 driven by strong growth in Private revenue (+25% yoy). On-going yield uplift from dynamic pricing will push Private revenue growth again in FY23f. Earnings growth from core Australia will be tempered by a rising cost base which was up 7.5% in FY22 (excluding the wage subsidy) due to investment in new product initiatives.
The acquisition of Trader Interactive has changed the geographic split of CAR’s revenue to almost 50/50 international to domestic. This brings both opportunity and some risk, particularly as the domestic business is well established while the international businesses are in various stages of maturity. The global addressable market opportunity is significantly expanded and exposes CAR to new markets such as the US non-auto industries in which TI has invested.
The offshore businesses generated strong growth in FY22, and CAR expects this to continue in FY23f. The full integration of TI will take some attention and effort, but CAR clearly has confidence in the future of this business.
The balance sheet is now carrying net debt of $518 million putting leverage at 1.9x as at 30 June 2022. Post completion of the TI acquisition, this will push up to 2.7x which the company expects to reduce to 2.0x within 2 years.
Investment view
The domestic car industry is enjoying a period of strength in demand for new and used vehicles, distorted somewhat by the lack of supply relative to orders.
Dealer profit margins have reached a new high gross margin per used car of $3,800 and CAR’s inventory of vehicles continues to grow. The company is making quick progress in digital retailing with dealers and consumers showing keen interest in the product set so far.
We are happy with the company’s progress but believe the share price has now accommodated the outlook.
Risks to investment view
If consumers spend less on motor vehicles, this may impact the vehicle advertising industry. Technology is a core element of the business and could pose a risk if it fails or does not deliver the required benefits. CAR has invested in a number of different geographies which presents local market risks.
Recommendation
We have retained our Hold recommendation.
FIGURE 1: FY22 RESULT
Figure 2: TRADER INTERACTIVE – PRO FORMA 100%
Figure 3: ENCAR
