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Leading market position creates scope to boost income
Thursday 17 Nov 2016 Author: Tom Sieber

A 10% share price decline in online used car marketplace Auto Trader (AUTO) year-to-date is an excellent opportunity to pay a lower price for a cash generative, high margin growth story.

The business has delivered consistently strong results since joining the stock market in March 2015. Latest half year results
(10 Nov) were no exception.

Auto Trader’s main source of revenue (84%) is its Trade division which sells subscriptions on selling, buying, marketing and price optimisation services to car retailers.

The remainder is accounted by private sellers, advertising agreements with partners in areas like insurance, car finance and vehicle checking and standard display advertisements on its website.

Rightmove lookalike

Auto Trader occupies a similar position in the automotive market as Rightmove (RMV) does in the property market.

It is by some distance the market leader with a 75% share. General classified advertising website Gumtree is its closest rival.

This creates a virtuous circle. Because Auto Trader’s site has the most vehicle listings it is the one most visited by prospective car buyers. This makes it a must-have product for car retailers and results in material pricing power.

Auto Trader has four ‘pillars’ – selling, buying, marketing and managing – which are broken up into different levels with the price points moving progressively higher.

By cross-selling and upselling the retailers on its books to a fuller suite of its services (currently being expanded) it could increase average revenue per retailer (ARPR) and drive significant earnings growth.

Upselling opportunity

For indicative purposes Liberum says immediately exploiting this opportunity to the same extent as Rightmove would increase its 2017 earnings per share estimate by 40%.

Increased take up of data services (increasingly important to retailers looking to optimise their stock) under the ‘managing’ pillar should also improve retention as Auto Trader’s services become more integral.

Other earnings drivers include continued migration of offline automotive advertising spend online and an ongoing reduction in staff costs.

Bumper cash returns

Limited capital requirements should see plenty of revenue turn into profit and cash flow.

Liberum reckons the company will return as much as 86% of its free cash flow to shareholders through dividends and share buybacks. The remainder will be used to pay down net debt which has already fallen from 3.5 times earnings at its IPO to 1.8 times.

Key risks

The main risks relate to an economic downturn and high equity valuation. Encouragingly the used car market is less cyclical than purchases of new cars.

In the 2007-09 downturn, peak to trough new car registrations fell 17% and used car registrations fell 9%.

We think the stock deserves its premium rating. (TS)


Auto Trader  (AUTO) 388.8p

Stop loss: 311p

Market value: £3.9bn

Prospective PE Mar 2017: 24.6

Prospective PE Mar 2018: 21.4

Dividend yield: 1.4%

Analyst price target: 510p (Numis)

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