One year ago, just after the 2015 results, we made a prediction: ‘Our estimate is Carsales will produce EPS of approximately 45 cents in 2016’. Lo and behold, in 2016 the automotive classifieds company produced earnings per share of exactly that number (actually 44.7 cents but who’s counting?).
We considered that sort of growth just adequate – and yet the share price has risen 31% since Carsales: Result 2015. This is a market that is willing to pay up for consistency.
The 2016 result was exactly that – consistent. As you can see from Table 1, revenues rose 10%, as did earnings before interest, tax, depreciation and amortisation (EBITDA). Underlying net profit growth was a little weaker, with an 8% rise to $108m. A final dividend of 19.5 cents was declared, only slightly up on last year (including last year’s nonsensical 1.4 cent special dividend).
Decent result as expected
Benefiting from buoyant conditions
Competition might be intensifying
In a sense, 10% growth in EBITDA is nothing to write home about. New car sales are buoyant – partly due to strong house price growth – and are expected to exceed 1.2m this calendar year. With Carsales having increased the price per lead that it charges dealers in January 2016 by 3.6%, on top of another price increase in April 2015, the 10% growth in ‘Dealer’ revenue to $124m was hardly spectacular.
The 19% growth in ‘Private’ revenue to $51m was better, with private seller ad volumes rising more than 10% in the second half. Again, that’s partly economically driven as sellers offload cars before trading up. Also benefiting this division was tyre sale website tyresales.com.au and car inspection business Redbook Inspect.
Revenue from the ‘Finance and Related Services’ division – mainly the consumer finance business Stratton acquired in 2014 – rose only 6% to $63m. Management attributed this to a ‘temporary volume capacity reduction’ at a major lender.
To us, this highlights another risk for Carsales – financing is cyclical and dependent on a panel of lenders. Also slightly ominous was management’s decision to split Finance revenue into ‘Core’ and ‘Other’. The latter is declining sharply which suggests this business is in transition.
Notwithstanding the problems at iCar Asia (which we’ll cover separately when it reports its interim result later this month), Carsales’ international businesses are generally performing well. On a ‘look-through basis’, revenues at Carsales’s International division rose 16% to $34m, while EBITDA rose 19% to $11m.
|Year to 30 Jun||2016||2015|| /(–)
|* 19.5 cent final dividend, 100% franked, ex date 21 Sep|
|Note: Figures are underlying results|
The result was driven by Carsales more mature international operations in South Korea (SKencar) and Brazil (WebMotors). The 49.9%-owned SKencar produced good revenue and earnings growth even as it reinvested in marketing. The 30%-owned WebMotors also produced decent growth despite the weak Brazilian economy, with management now trialling a move to a pay-per-lead model for dealers (similar to the model Carsales uses in Australia).
It looks like Latin America will be a bigger focus for Carsales from now on, with the company buying early-stage car classifieds businesses in Mexico and Chile during 2016. It’s even established a subsidiary called Carsales Latam Pty Ltd, perhaps in an attempt to frighten Latam Autos, an ASX-listed company that’s the Latin American equivalent of iCar Asia. With numerous start-ups competing for its attention, Carsales has no shortage of international opportunities.
Overall, the Carsales result was pleasing enough, although the 12% lift in the share price over recent days looks overdone. The market’s enthusiasm is probably the result of a re-acceleration of earnings growth at its core Dealer and Private advertising businesses although we’d argue there’s a cyclical element behind that. Guidance for ‘solid’ profit growth in 2017 won't have hurt either.
Despite the market’s enthusiasm, there’s some evidence that Carsales’s competitive environment might be intensifying. Gumtree is becoming more aggressive in attracting both private sellers and dealers to its site. The pay-per-lead price rises Carsales has been pushing through will make Gumtree’s ‘all-you-can-eat’ subscription model more attractive for some dealers. News Corporation has also offloaded its 55% stake in CarsGuide to Cox Automotive, the company that owns leading US classifieds site www.autotrader.com.
We’ve seen nothing to convince us to lift the prices in our price guide and, with the stock on a historical price-earnings ratio of 30 and an enterprise value to EBITDA multiple of 20, it is now closer to our Sell price than our Buy price. HOLD.
Note: The Intelligent Investor Growth and Equity Income portfolios own shares in Carsales. You can find out about investing directly in Intelligent Investor and InvestSMART portfolios by clicking here.