Carsales Cruising Here And Overseas

This story features CAR GROUP LIMITED. For more info SHARE ANALYSIS: CAR

Analysts raise target prices for Carsales following FY23 results on rising profits and growth in overseas operations.

-Brokers praise FY23 results for Carsales 
-Increasing Australian online advertising revenue 
-Strong growth in Asia and the US
-Trader Interactive moves to monetisation stage

By Mark Woodruff

Post the release of FY23 financials, analysts at major Australian stockbrokerages are almost unanimous in their view that Carsales ((CAR)) is displaying stronger resilience than expected to the weak macroeconomic backdrop. The future looks promising due to ongoing market share gains, price increases and new products, along with double-digit earnings growth from overseas operations.

Led by renewed optimism, Jarden has upgraded its rating to Neutral from Underweight, lifting its 12-month target price to $25.10 from $20.90.

The results were robust, agrees also Morgan Stanley, with EPS growth of 17% and an earnings margin lift to 54% from 53.2% in the year prior. Underlying profit of $278m was a year-on-year rise of 43% and around 2% ahead of the consensus forecast.

Apart from owning Australia’s leading automotive advertising website, Carsales also owns portals in South Korea (Encar) and Latin America via Webmotors in Brazil and Chileautos, and derives most of group revenue from dealers advertising used cars.

At the beginning of the financial year, the company snapped up the remaining 51% of the non-auto classifieds business Trader Interactive (now fully owned), which showed 22% pro forma revenue growth in FY23, underpinned by private yield increases and premium product penetration, explains Morgans.

UBS remains positive on Trader Interactive, which added over 300 dealers to the platform in FY23, primarily in Trucks and Powersports. Ord Minnett also raised its forecasts for the North American business.

A key highlight for Citi is the acceleration in Trader Interactive’s year-on-year revenue growth to 15% in the second half of FY23, up from 11% in the first half, despite weak recreation vehicle retail sales/inventory.

Although Trader Interactive does not have car classifieds, it is involved in listings of commercial trucks and motorcycles, heavy equipment, recreational vehicles, personal watercraft and light aircraft. The company also provides marketplace services, like those supplied by Carsales in Australia.

Australian online advertising revenue in FY23 rose by 15% to $353m, while earnings grew by 16% to $229m. Revenue for the Dealer, Private, Media and Data segments rose by 10%, 30%, 11% and 4%, respectively, on the previous corresponding period.

In Asia, revenue climbed by 9% and pro forma revenue in the US jumped by 22%.

Management still sees future opportunity to drive strong yield across the Dealer, Private and Media segments, even as new and used car prices normalise.

International success

The revenue increase of 30% to around $90m in Private came after management introduced dynamic pricing in March to the Trader Interactive business from a prior volume-based pricing model, explains Ord Minnett.

The following month, notes the broker, Trader Interactive introduced Premium Select, a media product based on intellectual property developed in the Australian business, and quickly signed up 400 dealers over just a few months.

As a result of these developments, this analyst now believes Carsales has moved to the next phase of maturation for the North American business, that is, to increasing monetisation from formerly consolidating the market for a specific category.

Down in Brazil, the Webmotors business is in the process of consolidating the automotive market.

Ord Minnett is confident this business will become the number one online automotive marketplace in the country (though it may take a decade), having already secured dominant market share in both Sao Paulo and Rio de Janeiro.

Morgans expects Carsales will continue to roll-out its IP into this business, particularly within Media.

Less positively, management announced it will be exiting the Mexico business.

Some negatives

Goldman Sachs notes a higher-than-expected depreciation and amortisation expense (due to higher capex) and interest are combining to offset the stronger earnings outlook.

Ongoing investment in Korea and a lack of price rises are also impacting earnings and driving softer management guidance for this business, explains the broker.

While there is downside risk to Private volumes in Australia, Citi believes this will be more than offset by upside risk potential in Brazil and the US, as well as for Dealer in Australia.

Outlook

Combined with dynamic pricing/finance tailwinds, Goldman Sachs sees a very strong growth backdrop in FY24.

Citi notes end-markets are starting to recover such as recreation vehicles in the US, finance in Brazil and Dealer Direct in Korea, and expects Carsales will deliver strong earnings growth of 16% in FY24.

FNArena's daily monitoring consists of six brokers who actively cover Carsales. There are four Buy (or equivalent) ratings and two Hold recommendations.

The average target price of these six brokers rises to $27.46 from $26.12 following FY23 results, suggesting only 2.6% upside to today's share price.

Jarden and Goldman Sachs are not monitored daily. As mentioned above, Jarden has upgraded to Neutral from Underweight, while Goldman Sachs keeps its Neutral recommendation. The average target price of both is $25.60.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms