Resilient CAR Group Motors On

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Analysts approve of CAR Group’s FY24 result praising the resilience of the domestic business and growth prospects overseas. 

-FY24 results for CAR Group in line with expectations
-Dealer revenues grow, Media outperforms
-Requirement for growth investment weighs on margins
-Ongoing strong growth outlook with potential M&A

By Mark Woodruff

Analysts liked FY24 results from CAR Group ((CAR)), citing a resilient Australian business and growth prospects internationally. A slight disappointment on margins is explained by the need for ongoing investment.

The group’s FY24 earnings and core profit were in line with consensus expectations, while management guided to “good revenue and earnings growth on a constant currency basis”.

CAR Group’s domestic platform generated stronger volumes, increased depth uptake and dynamic pricing, explains Morgans, while the international businesses, particularly Trader Interactive in the US and webmotors in Brazil, are also showing operational momentum and improved margins.

The majority of revenues derive from dealers advertising used cars. As there is increasing customer demand for used cars below $50,000, management alluded to a pick-up in leads growth, alongside growth in the dealer business.

Overall, Macquarie describes a “good counter-cyclical result as expected” with management executing on initiatives within its control. Consensus forecasts have risen post the market update due to yield growth in Australia and Brazil, partly offset by less operating leverage (margin expansion) than expected.

This yield growth in Australia and the pace of product innovation in the US (Premium Select) were the main positive surprises for Macquarie within the FY24 result. 

Slightly raising FY25 and FY26 revenue forecasts, Citi notes stronger-than-expected revenue guidance (primarily in Australia) combined with a stronger growth outlook for the automotive marketplace, webmotors.

Apart from webmotors, CAR Group’s other international investments include: Trader Interactive (US non-automotive marketplaces); Encar (Korean automotive); and various Latin American portals.

Providing a marketplace where both dealerships and individuals can buy and sell used and new cars, along with motorcycles, trucks, and boats, CAR Group also supplies research and reporting, car valuation and software analytics to a number of car dealerships.

Australian dealer revenues grew 12% year-on-year with the contribution from yield, price, and depth roughly equally spit.

Media outperformance

Both second half and FY24 Media revenue growth were a standout at 18% and 20%, respectively, partly driven by the diversification into non-auto, suggests Morgans.

While most market forecasts centre on the outlook for CAR Group’s Dealer advertisement products and its Private seller listings, Morgan Stanley considers its expertise on CAR Group revolves around insights on the company’s generally underappreciated Media segment, where digital display/banner advertisements are sold.

This broker disagrees with the consensus view the Media division is mature, and growth is limited to upswings in the overall advertising cycle. While the cycle is relevant, the analysts believe this business now has multiple ways to drive higher growth.

Importantly, Morgan Stanley points out the media product suite has potential to be leveraged in other geographies, with both the US and Brazil offering the most upside.

Margins

The group earnings margin of 52.9% in FY24 was -20bps below the consensus forecast. Further, consensus was expecting an earnings margin of 53.8% for FY25, but management guided to a margin similar to FY24, with limited margin expansion expected across any geography.

The FY24 margin ‘miss’ was primarily driven by the Latin American region, assesses Macquarie. 

Investment will remain high in FY25 across Australia, Trader Interactive, and Brazil, and will increase in Korea, notes Goldman Sachs. This investment, alongside business mix (i.e. lower margin Brazil growing fastest) is driving the expectations for flat margins, explain the analysts.

The FY24 dividend of 73cps was 1% ahead of the consensus estimate.

Trader Interactive 

While Trader Interactive revenue growth moderated in the second half, Goldman Sachs expects an improvement for FY25.

Dealer acquisition for Trader Interactive was below trend in FY24 with the addition of only 100 dealers on a net basis compared to management’s targeted range of 200 to 300.

Largely operating in the United States, this platform focuses on the digital marketplace for non-automotive vehicles and recreational equipment. Users may buy and sell items such as recreational vehicles (RVs), motorcycles, boats, commercial trucks, and heavy equipment.

Near-term earnings margin expansion will be constrained as management invests to catch-up after years of private equity ownership, explains Citi. An increased investment in brand is also expected, which will ultimately be supportive for medium-term growth.

Certainly, UBS see a potential re-rate opportunity for Trader Interactive especially in the event of interest rates easing, which could drive better dealer acquisition.

Outlook

UBS forecasts a 16% compound annual growth rate (CAGR) over the next three years for CAR group, driven by price rises and ongoing growth in average dealer spend from take-up of additional products, such as Premium Select. Ongoing growth is also expected for the new adjacencies – Private and Media.

M&A activity also has the potential to further accelerate growth, points out Citi, especially as current leverage is below targeted levels.

There are six brokers monitored daily in the FNArena database with five Buy or equivalent ratings and one Hold rating by Morgans.

Noting that Ord Minnett is yet to refresh research, the average target price for CAR Group has increased to $38.48 from $38.02 following the FY24 result. 

Outside of daily monitoring, Goldman Sachs lowered its target by -1% to $40.90. 

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