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Mid-Cap

One online business to BUY ?

October 21, 2014 | Team Kalkine
One online business to BUY ?

Stock of the Day – Carsales.com Limited (BUY)

Carsales.com Ltd (CRZ), operating in the online advertising business and data & research services in the automotive industry, has caught our attention today with its lucrative panorama.

CRZ witnessed sales of A$236.08m during the year ended June of 2014, which reflects a 9.7% increase from previous year. The Company has illustrated market leadership throughout 1H14. Operating revenue rose to A$112.3m, up by 10% on pcp with operating expenses up 1% on pcp. CRZ’s EBITDA was up 18% on pcp to A$63.5m and EBITDA margins rose to 57%. Operating cash flow was 18% up on pcp to A$43.3m. Further, EPS was found to be 18.5 cents per share, up 16% on the prior half year’s results. Factors that steered the growth primarily entailed the Feb 2013 lead fee price rise in automotive and organic non-automotive growth across various segments.


Financial Performance (Source – Company Reports)

Interim FY2014 dividend of 14.7 cents per share declared as opposed to 12.7 cents per share for interim FY2013.

The Company reported that the automotive dealer enquiry growth has been steady throughout 1H14, while the dealer and data services have shown good growth with revenue up 12% on pcp. CRZ’s investment in Webmotors SA (Brazil) has been a boon as it resulted in ~23% increase (on pcp) in revenue and contributed to A$2.3m to the NPAT. Dealer revenue growth rates were maintained soundly throughout 1H14. Dealer & Data Services revenues were driven by growth from Datamotive, Redbook and Livemarket.

Company’s Mediamotive segment also witnessed a 9% growth on pcp. However, 1H14 was affected by market conditions associated with the Federal election. In addition, some car companies (OEMs) also decided to remove online inventory, thereby impacting CRZ’s growth to some extent. However, CRZ may remain shielded from the dealer and OEM dispute based on its good vigor. In such case, top-up strategies such as the auto value chain may also be supportive. For example, the tyresales.com.au and the recent acquisition of Stratton Finance may provide ample opportunities to the Company. Thus, even when CRZ suffers a few jolts from the broader advertising market and changes in some OEM advertising strategies, it continues to leverage on its overall good performance.

CRZ reported its private revenue growth being consistent with prior year, i.e., up 7% on pcp. New product offerings by the Company are also boosting growth. For example, CRZ introduced a new “Premium Plus” product under the category of advertising-assist products.



Revenue (Source – Company Reports)

Although the Company experienced a waning new-car lead volume, the used car lead volumes grew progressively.The Non-automotive verticals have been performing well.

CRZ has also introduced lot many new products which aid in identification of great deals on new cars by the consumers. These include, integrated OEM Special Offer and offers with reference to virtual cars wherein cars are available in various colors. Then applications such as Comment Kick-starter which has been designed for use by private sellers’ for automatically generating comments on their cars, and other mobile based applications look enthralling.

As part of CRZ’s international businesses, WebMotors in Brazil and SK ENCARSALES in South Korea have been performing healthily. The change in ownership and present restructuring find these businesses at a nascent stage only though. The Company has a 22.9% stake in iCar Asia with operations in Thailand, Malaysia and Indonesia, which is also another point of attraction for consumers.
 

CRZ Daily Chart (Source - Thomson Reuters)
The Company forestalls a full year FY14 EBITDA to be around $138m, assuming stability in market conditions and its performance. It plans to release a range of new product developments over the next six months. Further, the Company’s strategy to succeed will emphasize on innovation, new car models along with growth in non-automotive segment. Holistically seen by the Company – 2H14 appears to commence in good health. NPAT growth in FY15 may be based on acquired growth from Stratton along with CRZ’s EBITDA and revenue. There is a possibility that Stratton is introduced across Carsales’ range of verticals, and is also seen to replace CRZ’s existing iGnition finance product. CRZ’s video-based new site Pitchi may also drive EBITDA margins.

We do see few headwinds relating to competition from new entrants and changing consumers’ taste for evolving technologies, a material reduction in inventory, and reduction in internet traffic to Company’s websites.

Nonetheless, CRZ’s capabilities to sustain a market leader position and to outpace others through its core business strategies and organic growth, provokes us to believe that CRZ does have an immense potential. We thus recommend a BUY for this stock at the current price of $9.48.
 
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