Carsales: Ready For More Growth

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Carsales posted a solid interim result and even more robust growth seems to be on the horizon.

-Carsales’ interim result showed no signs of a spending slowdown
-US acquisition Trader Interactive poised for positive growth contribution
-Most brokers willing to back management’s positive outlook

By Nicki Bourlioufas

Strong earnings growth might be ahead for Carsales ((CAR)) with the number of car advertisements likely to increase after a downturn in 2021-22 while recent acquisition US digital marketplace Trader Interactive (TI) should also contribute positively.

Chief executive officer Cameron McIntyre said Carsales’ first-half performance has been “exceptional” with the company delivering double-digit earnings growth, demonstrating a resilient business model “with a track record of growth through the cycle as well as strong operating discipline.” 

The company posted pro-forma revenue of $388m, up 15% on the prior corresponding period (pcp) and earnings before interest, taxes, depreciation and amortisation (EBITDA) of $211m, up +17% on the pcp.

Adjusted net profit after tax (NPAT) jumped 37% to $122m. 

“We are seeing good levels of consumer demand in our key markets and inventory is approaching pre-pandemic levels …. This all gives us confidence that Carsales is in a strong position to deliver outstanding shareholder returns in FY23,” McIntyre said.

Strong Growth Ahead

Several brokers agree with that sentiment.

One of the most upbeat is Morgan Stanley, declaring: “Carsales’s competitive position in Australia has never been stronger”.

While advertisements in the company’s real estate and jobs verticals are expected to drop from record volumes in 2021-22, the number of car ads is expected to rise as restrictions on car supply ease.

“Our channel checks say global [car] supply is slowly returning, consumer demand remains elevated…and a period of turnover catch-up is expected in 2023-24.”

Credit Suisse too has an Outperform rating on the stock with a price target of $25.40. This broker has increased its target price slightly to $25.40, supported by the prospect of higher domestic earnings.

Macquarie said a highlight of the result was the Australian private business. Macquarie too has maintained its Outperform rating on the stock with a price target of $24.50.

“We continue to expect Carsales.com to remain resilient in light of moderation in the automotive markets in Australia and discretionary markets in the US.”

UBS (Buy) found trading commentary indicates no slowdown in consumer demand or any change to the positive momentum across Carsales’ businesses, “with yield growth a feature across all of CAR's geographies.”

UBS’s price target is a healthy $26.00, close to Morgan Stanley, which combines its Outperform rating with $26.50 price target.

The Neutral Views

Goldman Sachs is Neutral on the stock with a $23.00 price target, but it likes the US acquisition.

During the first half of FY23, Carsales purchased the remaining 51% of Trader Interactive. Consistent with the company’s comments of stronger revenue growth to come from TI in January and  February, Goldman Sachs forecasts revenue growth from TI to jump 15% in 2H23 from 11% in 1H23.

In contrast, Australian revenue growth is expected to slow to 9% in 2H23 from 17% in the first half, given softer dealer lead volumes.

While Morgans has a hold rating on the stock, it believes Carsales is laying the foundations for longer term growth, within Australia and internationally, while fortifying its economic moat by enabling dealers to bring transactions online.

Morgans has a $24.30 target price.

The Carsales share price has been a strong performer in 2023, up more than 10% year to date compared to the ASX/S&P200’s circa 5% gain.

FNArena’s consensus price target, which is derived from the freshly updated targets set by six major stockbrokerages in Australia, currently suggests 6% more upside to $24.91.

Targets set by Morgans, Macquarie, UBS, Credit Suisse, Morgan Stanley and Ord Minnett range between $22.80 (Ord Minnett) and $26.50.

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