Recent price weakness for Carsales.com is at odds with upwardly revised consensus earnings forecasts. With full ownership of Trader Interactive (TI), a lower AUD and a smartly timed price increase on dealer lead fees, the earnings outlook is quietly promising.
Yield of dreams. A key feature of the leading online advertising businesses in Australia (CAR, SEK, REA, DHG) is the ability to increase yield steadily and regularly, regardless of what is happening to volumes. This is not purely price increases but also from new products that add value to the customer. CAR has continued to innovate on its product range with products such as Instant Offer for private customers. Premium products such as depth and dealer finance continue to add value to the Dealer category.
In FY22, Dealer revenue increased 6%, with 1% of the increase due to volume, 1% due to depth/other and 4% to yield. Lead to sale conversions were strong in FY22 so CAR has taken the initiative to increase dealer lead fees by $5. This out-of-cycle price rise is a smart move, in our view, taking advantage of the very high dealer profit margins. If used car market conditions weaken next year, it would be more difficult to lift the price although we expect used car demand to remain relatively stable in tougher conditions. Dealer lead margins would likely also remain broadly flat.
Private revenue growth should remain robust in FY23f supported by growth in Instant Offer and a higher yield. CAR says that since implementing its value-based pricing strategy in FY17, private yield has increased at 12% compound per annum.
TI strategy. CAR completed its acquisition of the remaining 51% of TI on 3 October 2022. CAR raised A$1,207 million in new equity and refinanced its debt facilities as part of the transaction. The company can now accelerate its opportunities across the markets that TI operates in, introduce new products and services and bring CAR’s expertise to much of what TI already does fairly well.
The note of caution we see is a weakening US economy although this may be mitigated by TI’s subscription pricing model and a price rise enacted in April.
Investment view
One reason why yield growth is so achievable in online advertising is the relatively small cost compared to the underlying asset. Commission on real estate, for example, might be 1.5% of the property sold. For CAR, the cost of advertising a vehicle for sale is typically less than 0.5% of the vehicle. Increasing prices by adding value to the process for the seller is therefore fairly straightforward. CAR believes there is a long runway for price-to-value alignment.
Following the release of the FY22 result, CAR’s share price has been dragged back by a falling market. There is limited cyclical earnings risk in CAR, an advantage in an uncertain economy. Consensus earnings forecasts have lifted since the FY22 result demonstrating the underlying value that is emerging in the share price. The FY23f PE ratio of 26x is still above the 21x we think the market will pay for growth stocks, and this tempers our recommendation.
Risk 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 revenue growth factors in dealer and private
