CAR made a presentation on its US business, Trader Interactive (TI) detailing the growth opportunity.
CAR’s philosophy for online marketplaces is simple and logical – larger audiences and the most inventory attracts more buyers and sellers and vice versa. The key factor that brings it all together is the dealer market where TI aims to grow its value proposition for dealers. In volume terms, TI sits at around 30% of the US market so it already has a genuine base from which to grow. Increasing depth usage and penetration, creating better products and applying yield management are the means by which TI will lift dealer subscription volumes.
Yield management in particular can add significant value through greater use of dynamic pricing which simply means aligning the advertisement fee to the value of the item. Dealer yield increased by 12% in FY23 comprised of price increases across all segments and new depth products. TI expects to invoke further price increases although the amplitude will be less vigorous as dealer customers are facing tougher market conditions. Depth penetration is less than 10% of inventory which presents a major opportunity to boost yield growth.
Media presents another opportunity for substantial growth in TI. The large existing audience is currently underutilised from an advertising perspective. TI recently implemented the Carsales ad tech platform and is already seeing results. It will take time to fully flesh out the opportunity but there is no barrier to achieving a meaningful contribution to earnings from this source despite plenty of competition. Media accounts for ~15% of CAR’s Australian business indicating the level of contribution that TI can potentially reach.
An opportunity exists in the private market where TI’s penetration is less than 5% currently. However, the vast majority (~90%) of US transactions are trade-ins so a change of consumer behaviour is needed to encourage a different approach to selling RVs, motorcycles and trucks.
TI has launched into the marine market with a new site targeting the large addressable boat market estimated to be twice the size of the RV market. TI is up against a strong incumbent so building an audience will take time although we would not exclude an acquisition in this space.
Investment View
CAR has owned TI for over a year now, so the business update was an insight into how CAR had introduced change and implemented its own processes and influence. The evidence is that TI is performing very well. Revenue in FY23 increased 13.5% and there are multiple growth opportunities ahead including yield growth and especially in media.
But the economic conditions have changed for dealers. After a strong post-COVID boost, many dealers are seeing the effect of higher interest rates squeezing consumer demand and increasing the cost of holding inventory. TI’s subscription base gives it some protection although dealers may look to cut back on marketing. In such conditions, we would anticipate a tougher year for TI in FY24.
The Australian business now represents about 52% of group EBITDA in FY23 after the acquisitions in TI and Webmotors (Brazil) on a pro forma basis. CAR has built a very successful business in Australia and is transcribing its success into these new investments.
The CAR share price has performed strongly so far in 2023 and is trading on a lofty FY24 PER of 33.5x consensus forecasts. In our view, this is fully valuing the Australian business but the international growth aspect may be a little longer dated than the market thinks.
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.
