Company Reports

Following its fiscal 2024 results, we increase our fair value estimate for narrow-moat Car Group by 7% to AUD 29 per share. The company reported AUD 250 million in net profit aftertax, exceeding our AUD 240 million forecast, mostly due to top-line outperformance. The company continues to capture a larger share of the car retailing value chain, which warrants updates to our assumptions.

We expect the medium and long-term strategic focus for Car Group to revolve around functional and geographic expansion.

We raise our fair value estimate for narrow-moat Car Group by 4% to AUD 27 per share following a review of its Brazil business, Webmotors. Our review was prompted by the recent announcement by narrow-moat Seek to exit Brazil and Mexico, following more than a decade of unsuccessful attempts to enter the market. We had expected Seek to be unsuccessful in the region, while we expected and continue to expect Car Group to be successful there due to differences in network effect dynamics. Following our review, we are upgrading our revenue growth and margin expansion assumptions for Car Group’s Latin American segment. At current prices, Car Group’s shares continue to screen as materially overvalued.

We expect the medium and long-term strategic focus for Car Group to revolve around functional and geographic expansion.

We expect the medium and long-term strategic focus for Car Group to revolve around functional and geographic expansion.

We raise our fair value estimate for narrow-moat Car Group by 4% to AUD 26 per share. The increase in our fair value estimate primarily reflects the time value of money and interim 2024 results being slightly above our expectations. At current prices, Car Group shares continue to screen as materially overvalued.

We expect the medium- and long-term strategic focus for CAR Group to revolve around functional and geographic expansion.

Following shareholder approval at its annual general meeting and registration with the Australian Securities and Investments Commission, the former Carsales.com has changed its name to CAR Group. The name change will be effective on the ASX on Friday, Nov. 3, 2023. The company’s ticker is unchanged. Our fair value estimate is unchanged at AUD 25 per share. At current prices, CAR Group shares screen as overvalued.

We raise our fair value estimate for narrow-moat-rated Carsales by 9% to AUD 25 per share following the release of its fiscal 2023 results. The increase in our fair value estimate reflects the time value of money and upgrades to our assumptions for Carsales’ North American business, as it transitions to a more aligned pricing model faster than we previously expected. At current prices, Carsales shares screen as slightly overvalued.

Narrow-moat-rated Carsales.com’s first-half result broadly aligned with our expectations for a resilient fiscal 2021 and we largely maintain our earnings forecasts. Nonetheless, we increase our fair value estimate by 3% to AUD 18.00 per share reflecting the time value of money effect on our financial model. However, the Carsales.com share price has performed well in recent months and, at the current price of AUD 21.75, is overvalued.

Carsales is Australia's largest aggregator of online automotive classified advertising. We rate Carsales as having a narrow moat through the network effect because its website attracts the largest audience of buyers and sellers of motor vehicles. Buyers are attracted to carsales.com because of the need to access the largest inventory, while sellers are attracted to the largest audience. This virtuous cycle increases inventory and customers, making competitor sites increasingly irrelevant.

We have cut our earnings forecasts for narrow-moat-rated Carsales.com and now expect fiscal 2020 underlying NPAT to fall by 22% to AUD 101 million, versus our previous 4% growth forecast. Although Carsales.com’s first-half result was impressive, the earnings impact in the second half of fiscal 2020 and early fiscal 2021 from the coronavirus-related economic downturn is likely to be severe and we expect second half fiscal 2020 underlying NPAT to be 37% below the previous corresponding period, or pcp.

We have increased our fair value estimate for narrow-moat-rated Carsales.com by 9% to AUD 17.20 per share following another good result from the company. Although we’ve slightly lowered our fiscal 2020 earnings forecasts, our 10-year EPS CAGR remains around 11% and we’ve increased our long-term earnings growth assumption to 4% from 3%, which is the main driver of the fair value increase. However, at the current market price of AUD 19.00, we continue to believe the shares are overvalued. Our fair value implies a P/E ratio of 31 versus 34 at the market price. Management continues to expect "solid" earnings growth in fiscal 2020, which we interpret is in line with our 4% EPS growth forecast.

We have updated our financial model for narrow-moat-rated Carsales.com to reflect the introduction of the new accounting standard relating to operating leases, known as AASB 16. The new accounting standard aligns the treatment of finance and operating leases and effectively assumes the lessee has financed the purchase of the leased asset with debt. This results in the replacement of rental expenses with additional depreciation and interest expenses.

Narrow-moat Carsales.com’s fiscal 2019 result is in line with our expectations, with revenue up 11% to AUD 418 million on a like-for-like basis, versus our AUD 420 million forecast. Like-for-like underlying EBITDA growth of 7% to AUD 210 million matched our forecast. Management’s outlook statement was vague but broadly positive, with solid revenue, adjusted EBITDA, and net profit after tax expected in fiscal 2020 versus our 8% revenue growth and 13% EBITDA and NPAT growth forecasts.

We are pleased, but not particularly surprised, that narrow-moat Carsales.com has decided to sell its 50.1% shareholding in Stratton Finance. The company bought its Stratton shareholding in 2014 for AUD 60 million but the business has faced several challenges recently; including regulatory change, competition, and weak new cars sales caused by falling real estate prices and the associated wealth effect. The Stratton investment was impaired last December to about AUD 12 million, an immaterial value relative to Carsales.com’s market capitalisation of AUD 3.4 billion, and we expect Stratton to comprise less than 1% of group EBITDA in fiscal 2019.

We have maintained our fair value estimate for narrow-moat-rated Carsales.com at AUD 14.50 per share following its weak first-half result. At the current market price of AUD 11.52, we continue to believe the shares are undervalued and that the market is underestimating the potential of the international businesses and the resilience of the core Australian businesses. The market price implies a fiscal 2019 price/earnings ratio of 22, versus 27 at our fair value, and a dividend yield of 3.9%, or 5.6% including franking credits.

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.

Narrow-moat-rated Carsales.com looks undervalued following the recent global technology stock sell-off, with the current market price of AUD 12.30 meaningfully below our AUD 14.50 fair value estimate. Despite the share price weakness, the company continues to dominate the online automotive advertising market in Australia and is strengthening its business via domestic diversification and international expansion. The potential threat from companies like Facebook and Gumtree is not materialising in the way it theoretically could which we attribute to the depth of information and number of listings on carsales.com.au and associated network effect. Over the next decade, we expect the company to grow EPS at a CAGR of 11%.

Narrow-moat-rated Carsales.com reported a good fiscal 2018 financial result but one which was broadly in line with our expectations. Although the 19% increase in revenue was higher than our 17% forecast, EBITDA growth of 16% was lower than the 20% we expected. The result was also distorted somewhat by the change in accounting policy for SK Encar following the increase in Carsales.com's ownership to 100% from 49% in January 2018. Although the result was good, we don't believe it warranted the 10% share price jump which followed the announcement.