Carsales.com

When upgrading Carsales.com in Carsales’ hidden value on 13 Mar 13 (Long Term Buy – $9.21), we noted the company’s aspirations to partner with similar businesses overseas ‘where perhaps there’s an argument about who’s number 1 or 2 or even number 3 and add value to that business and grow it to a clear market leader position’, in the words of chief executive Greg Roebuck at the company's interim results in February.

At the time, Roebuck indicated that they’d been looking for a long time and come up with nothing, so we weren’t expecting much. But a couple of recent deals suggest that the opportunities have improved or that the company has relaxed its criteria. We’re happy to back management at the moment and assume it’s mostly the former. The deals do at least appear to fit the main criteria described by Roebuck, being part investments into market-leading or near-market-leading businesses in developing parts of the world.

The first deal was to pay $13.4m for 20% of iCarAsia, a company listed on the ASX which has operations in Malaysia, Indonesia and Thailand. iCarAsia is at an early stage of development and looks unlikely to turn a profit for some time (you can read more about it in this blog article).

The second deal, announced today, is more substantial, involving the payment of about $89m for 30% of Webmotors, the No. 1 automotive website in Brazil. Banco Santander owns the other 70%. Webmotors already makes positive earnings before interest, tax, depreciation and amortisation and Carsales expects the deal to enhance earnings per share from 2014 onwards.

The total $102m cost of the acquisitions will be funded by the company’s cash balance (of $41m at 31 December) and then debt, but that’s very comfortable for a company that generated $66m of free cash flow in 2012.

Carsales appears to be following Seek’s strategy of taking stakes in similar businesses in developing regions around the world, and then lending its expertise to help them prosper. And that’s no bad thing – in fact it’s such a good strategy, you’d say that if Seek hadn’t invented it someone else would have had to.

In line with our new approach to recommendations we’re changing our recommendation on Carsales from Long Term Buy to Buy. In our price guide, Long Term Buy below $11 becomes Buy below $11 and Take Part Profits above $16 becomes Sell above $16.

Our recommended maximum portfolio weighting, which is now based purely on risk rather than value, rises from 3% to 6%. However, we'd suggest that, given the current price is only slightly below our Buy price of $11, it might make sense to buy half of that 6% weighting at this point, leaving some room to increase it if the price falls further. BUY.