Credit Crunch Unlikely to Impact Carsales.com as Much as the Share Price Implies

Narrow-moat-rated Carsales.com remains undervalued following three months of share price weakness. The stock has been impacted by several factors including a deterioration in technology stock investor sentiment, tighter lending standards following the Financial Services Royal Commission, and the negative wealth effect from falling real estate prices. However, despite the 30% share price fall since August, we maintain our fair value estimate at AUD 14.50 implying the market price of AUD 11.36 offers value. We forecast an 11% EPS CAGR over the next decade, versus 18% over the past nine years, driven by an 8.5% revenue CAGR, combined with profit margin expansion. Our fair value implies a fiscal 2019 price/earnings ratio of 26, versus 15 for the S&P/ASX 200 index, and a dividend yield of 3.3%, or 4.7% including franking credits.