Small Caps | Feb 13 2015
-Strong shift to digital advertising
-Technology  to enhance offering
-Emerging attraction of Latin America
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By Eva Brocklehurst
Canaccord Genuity has joined Moelis in recently initiating coverage of LatAm Autos ((LAA)), which is growing in significance in the Latin American vehicle classifieds market. The company intends to use the proceeds from its recent listing to invest in technology that will increase its competitive advantage and relevance.
Canaccord Genuity is a believer in the benefit of the shift to digital advertising, the rise of internet penetration and the significance of the car market with the growth of the middle class in Latin America. The broker initiates with a Speculative Buy rating and a 36c target. The targeted subscription model is expected to provide a degree of earnings visibility and also increase the level of engagement with car dealerships.
The company is working on releasing an enhanced software platform, PTX, across its key markets which should improve the search functionality and website efficiency for all users. A dealer management system will be rolled out which will enhance the way dealerships interact with consumers, boosting loyalty to LatAm Autos’ platform. This should also enable the company to promote high margin transactional products through its dealer network. The broker observes LatAm Autos has $12.9m in cash to invest in technology and acquire listings. Increasing the range of depth products through its platform remains significant opportunity in the broker’s view, although market dominance and maturity is needed for this to occur.
To the broker, history demonstrates the importance of being well funded and leading the provision of a portal in large emerging markets, but it is also difficult to apply traditional valuation methodologies with this new business model. What underpins the broker’s optimism is management’s focus on having the largest number of quality car listings in each of its target markets. Once scale is achieved, Canaccord Genuity expects private car vendors will be charged a fixed fee per basic and premium listing. Private sellers currently provide the smaller percentage of revenue on the website.
LatAm Autos’ most advanced asset is its Ecuadorean business, which owns PatioTuerca.com. Following its successful implementation in Ecuador, a roll out across the other operating regions is expected to commence in 2015. The broker believes operating the six websites on the same technology will accelerate the path to profitability.
Canaccord Genuity considers Latin America one of the most attractive emerging markets globally. LatAm Autos’ main competitors in the automotive online business are mostly privately owned. In this scenario being a listed player is a competitive advantage, as the company will have access to capital to fund growth opportunities as they arise. The broker points out there is yet to be a clear winner in Latin America’s online vehicle market and that, over the past three years, jobs and real estate online classified entities have undergone consolidation.
The broker believes LatAm Autos is still 3-5 years away from a serious inflection point in earnings but the business is well advanced. In the broker’s opinion, to be the dominant online automotive portal provider, the incumbent needs to invest for three to five years to gain a market share of over 70% in listings, audience and leads to dealers.
See also Online Spurs Upside For Latam Autos on February 2.
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