Australia | Jul 02 2014
-Co-benefits in Stratton acquisition
-Private market not well served
-Good leverage for Carsales
-Historical growth rates slowing
By Eva Brocklehurst
Online market place, Carsales.com.au ((CRZ)), has acquired a 50.1% stake in a domestic finance broker, Stratton Finance, for $60.1m. This is the company's fourth acquisition in 18 months but its first in the finance arena. Limited financials have been disclosed yet but brokers have found the transaction appealing. Carsales seeks an opportunity to grow broker share of the vehicle finance market as well as Stratton's share of broker commissions.
The founders of Stratton will retain the minority stake and Carsales will control the board and consolidate the earnings. Stratton generates commission revenue from loan financing, for predominantly private vehicles, with no up-fronts and no trailing commissions. Carsales expects the acquisition to be immediately accretive and will fund the investment via debt.
The deal is a structural hedge on shifting consumer behaviour – towards more private transactions and away from dealers, in Citi's view. Using what detail was provided and industry knowledge, the broker estimates Stratton will generate a profit of $10m and gross revenue of $37m in FY15. The business is already profitable on a standalone basis and this signals to Citi the downside risk is modest.
Deutsche Bank also thinks the deal is a mild positive and envisages a path whereby the relationship with Carsales can enhance Stratton's growth profile. Stratton products had been wound back on the Carsales website so increased promotion could lead to further earnings growth for the Stratton business. This is dependent on not being seen as threat to other dealer finance and insurance brokerage earnings on the Carsales site. Moreover, Deutsche Bank observes the majority of display advertising is provided by finance and insurance companies, so Carsales needs to be careful not to upset potential advertisers.
Stratton is one of the highest traffic-generating vehicle finance websites in Australia, and brokers expect significantly greater value can be realised longer term for Carsales if it can leverage this large database of new and used car buyers, and Stratton can cross-sell into Carsales' private business. Macquarie observes Carsales has an exceptionally strong franchise in vehicles and scope for significant growth in adjacent vertical markets and complementary products. Finance companies have tighter relationships with customers and hold more data on these customers than Carsales does. This can be valuable for generating leads. Stratton also buys cars in bulk from dealers to sell. Macquarie believes not only is there a clear growth opportunity in Stratton, the acquisition could also be seen as defensive for Carsales as well. To counter the perception of dealer conflict, the broker notes Carsales is promoting Stratton as operating in the private-to-private marketplace.
BA-Merrill Lynch anticipates that display advertising in online classifieds, as it matures, will transfer to a model more focused on providing leads to the advertiser. In Carsales case this is particularly relevant for finance and insurance providers. Finance and insurance are a relatively small, albeit a significant part of the company's display ad revenue, Merrills notes. Dealers are already significant players in vehicle finance but the private market is not particularly well served, and Carsales is well situated to leverage this opportunity. As there is no visibility on current earnings or outlook, Merrills takes a conservative approach and values the Stratton business at the purchase price. Despite the soft outlook for the domestic economy, Merrills considers used cars to be the least cyclical of the vertical online classifieds, and with that in mind reiterates a Buy rating.
Carsales can bring value to the Stratton business, in Credit Suisse's opinion, as it builds an expanding portfolio outside its core Australian used car market. In this instance, the broker thinks there are similarities with the strategy that has added value for SEEK ((SEK)) shareholders. The broker also observes Carsales is not intending, at this point, to compete with dealer finance.
UBS stands out with a Sell rating. The broker takes stock of the company's long-term share of addressable markets and international assets and observes growth is slowing from historical levels in terms of volume, market share and display. Therefore, the company needs to deliver earnings growth via yield, cost management, new products and acquisitions, all of which carry higher risk. The broker thinks the positive reaction to the Stratton news is overdone.
On FNArena's database UBS is the lone Sell rating. There are seven Buy ratings. The consensus target is $11.78, suggesting 5.2% upside to the last share price, and compares with $11.69 ahead of the announcement. Targets range from $8.45 (UBS) to $13.75 (BA-Merrill Lynch).
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