Company Overview: carsales.com Limited (ASX: CAR) is an online automotive, motorcycle and marine classifieds business in Australia. The company's carsales network is an online shop for buying and selling cars, motorbikes, trucks, boats, and machinery equipment. The company’s reportable segments consist of (1) Online Advertising Services, (2) Data and Research Services, and (3) carsales Investments. The company was listed on ASX in September 2009.

CAR Details

CAR Rides on Strong Fundamentals & Geographical Expansion: The company delivered robust half-yearly numbers across Australian and International portfolio, indicating the strength of its global business and the ongoing growth ability from new products and services. With elevated consumer engagement and robust product adoption, CAR has bolstered competitive position in all key markets.

Key Strategies & Adhesiveness:

• Acquisition Synergies: The company is witnessing international growth with robust performances in South Korea and Brazil. The company completed the buyout of Trader Interactive (for 49% stake) in September 2021 and remained confidents to deliver value for shareholders through this investment. With this acquisition, the company is looking forward to leveraging market expertise, technology innovation and new product development to drive improved financial returns.
• Geographical Expansion: The company witnessed robust growth in the Australian and International market, driven by growing customer penetration, user experience improvements and increased awareness from marketing investment. In Australia, the company delivered adjusted revenue growth of 16% on pcp. Talking about the international market, revenues went up by 76% year over year, with growth supported by the inclusion of Trader Interactive. In South Korea, revenues went up 19% on pcp, driven by strong product penetration growth across Guarantee, Dealer Direct and Encar Home.

The below picture depicts a continuous growth trajectory in CAR’s revenues since 1HFY18.

Revenues Highlight; Analysis by Kalkine Group

Key Findings from 1HFY22 Results:

• Strong Operational Performance: The company reported total revenue from continuing operations of $241.86 million, up 21.6% on the pcp. Look-through revenues went up by 30% on pcp. Reported EBITDA for the period stood at $125 million, up 10% on the pcp, whereas look-through EBITDA was up 15% on the pcp. Reported NPAT for the period increased by 22% to $75 million, whereas look-through NPAT was up 20% on pcp. Robust domestic results in the Private and Media segments, outstanding growth in Encar in South Korea and ongoing investment in product aided the financial performance.
• Strong Pay-out ratio: Over the last five years, the company has consistently distributed stable dividends with healthy payout ratio in the range of 75% to 82%. Based on strong performance in 1HFY22, the company had declared an interim dividend of 25.5 cents per share which implies the rise of 2% on the corresponding prior period and a payment date of 19 April 2022. This represented a dividend payout ratio of 80%. The YoY growth in the dividend will support the company garnering the focus of the market participants, and opportunities to acquire further ordinary shares in CAR.
• Liquidity Position: The company is into the asset-light business model, which generates good cash flows and sustainable dividends to its shareholders. The company reported EBITDA to operating cash flow conversion of 100% in 1HFY22. The company’s net debt amounted to around $554.8 million at the end of 31 December 2021, largely indicating increased debt required for the financing related to the Trader Interactive acquisition. The company’s leverage ratio stood at 2.2x in 1HFY22, compared to 1.5x in 1HFY21.

Key Metrics: For 1HFY22, the company reported an EBITDA margin of 51.9%, higher than the industry median figure of 16%. In 1HFY22, the company recorded net margin of 31%, higher than the year-ago figure of 30.6%.

Profitability Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 23.56% of the total shareholdings, while the top 4 constitute the maximum holding. Aware Super held the maximum number of shares with a percentage holding of 6.18%, followed by The Vanguard Group, Inc. holding 4.56%, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis: The company is susceptible to certain risks such as risks associated with cyber security, information technology, international expansion, credit availability, and stiff competition. Further, a leveraged balance sheet, regulatory risk, low entry barrier business model, and shifts in consumer preferences add to the woes.

Outlook: The company’s ongoing investment in product and customer experience is expected to strengthen its leadership position in the largest markets of Australia, South Korea, and Brazil. Its two most significant international assets in South Korea and Brazil continue to demonstrate impressive growth profiles, and both have substantial further upside. Further, the company expects to maintain its sales growth, expand margins, and generate decent cash flows in the upcoming years. In the long run, operational efficiencies and robust marketing strategy across its product mix will aid the growth in cash flows from operations.

Notably, the company expect to deliver solid growth in adjusted revenue, adjusted EBITDA and adjusted NPAT in FY22. Underlying domestic market conditions have recovered significantly since the lockdown period in the 1HFY22. Hence, it expects improvements in 2HFY22, supported by improved volumes, higher yield, and growth in key products.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative) 

Source: Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: The stock of the company has been corrected by ~19.66% in the past three-months. Currently, the stock is trading slightly below the average of its 52-week high and low levels of $26.67 and $16.72, respectively. The stock has been valued using the P/E multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount compared to its peers, considering a rise in net debt, integration risk, low entry barrier business model, shifts in consumer preferences, etc. For the purpose of valuation, peers such as Seek Ltd (ASX: SEK), REA Group Ltd (ASX: REA), Seven West Media Ltd (ASX: SWM), and others have been considered. Considering the higher revenue base, robust customer base, product launches, positive outlook, increase in customer base, current trading levels, and upside in valuation, we recommend a ‘Buy’ rating on the stock at the current market price of $20.610 as on 18 February 2022, 12:30 PM (GMT+10), Sydney, Eastern Australia.

CAR Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above. 

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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