Company Overview - carsales.com Limited is engaged in online classified and display advertising business and provides a range of software, data and other services to customers in the automotive industry. The Company operates in two business segments: Online Advertising Services, which offers classified advertising and display advertising services. Classified advertising encompasses both private sellers and dealer customers. Display advertising involves corporate customers, such as automotive manufacturers/importers, finance and insurance companies placing advertisements on its Website and Data and Research Services, where the Company’s divisions of Redbook, LiveMarket, DataMotive and DataMotive Business Intelligence provide various solutions to a range of customers, including manufacturers/importers, dealers, industries, finance and insurance companies offering products including software, analysis, research and reporting valuation services, website development and hosting and photography services.

Dividend Numbers (Source - Company Reports)

Financial Performance for FY15

• Carsales.Com Ltd (ASX: CAR) reported outstanding revenue growth of 32% to $311.8 million for the fiscal year of 2015, as compared to $235.6 million in fiscal year of 2014. The data & research and International segments contributed to the increase, rising 14% yoy and 11% yoy respectively. The online advertising revenues, which is the group’s core business improved by 6% yoy to $216.5 million in 2015 financial year.  However, the Operating expenses (before interest and D&A) surged 62% on a year over year basis to $157.5 million in FY15 impacted by Stratton acquisition. Therefore, EBITDA rose only 12% to $154.3 million as compared to earlier fiscal year in spite of surge in revenues. Therefore, the reported EBITDA margin slightly rose to 49.5% for the 2015 financial year, against 48.3% in first half of fiscal year 2015 and 58.7% in 2014 fiscal year, impacted by acquisition of Stratton. Moreover, the traditional business EBITDA margin marginally fell by 1.2% in FY15, due to one-off costs related to business development, and employees increase in sales and technology.
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       Financial performance over the years (Source: Company Reports)

• Meanwhile, Carsales.Com received a one-off non-cash gain of $3.5 million related to dilution of iCar stake to 20.2%. The earnings per share before one-off gains improved by 4% yoy or 1.5 cents to 41.7 cents per share, while the reported EPS increased by 3.0 cents per share to 43.2 cents per share in FY15. Carsales increased its final dividend by 10% yoy to 19.1 cents per share. But, Carsales net Debt rose by over $40 million to around $188 million as at June 30 2015, as the group has been using cash for investments and acquisitions. Even the Operating cash flow/rolling 12 month EBITDA decreased to 66%, as compared to Operating cash flow/rolling 12 month EBITDA of 73%, due to cash payment by Stratton of pre-acquisition tax liabilities and a shift to monthly tax payments for CAR (from quarterly). Meanwhile, the proforma operating cash flow stood at $112.9 million and had 73% conversion from EBITDA in FY15. On February 2015, the car sales executed a $325 million refinancing program through a syndicated debt facility to fund its further growth.
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• CAR Organisational Structure (Source - Company Reports)
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  Domestic Segment Performance
   
• The dealer revenues soared 7% to $112.9 million as compared to last fiscal year, driven by the dealer automotive enquiry volumes which rose 4.4% on a year over year basis. The new car inventory increased 8% yoy to approximately 35,000 cars against last year as manufacturers returned inventory to carsales, while the used vehicle inventory by dealers was in line to FY14. Premium advertising products like guaranteed Top Spot and Top Deals received positive response during the year. As per the private segments, revenues improved by 8% yoy to $43.0 million due to ongoing growth of domestic investment at tyresales in the B2C segment. The Private time to sell was quicker by approximately 11% on average against FY14, which consequently decreased inventory by over 11% yoy to over 77,000 cars as at 30 June 2015.
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      Domestic Segment revenue mix and Dealer segment performance (Source: Company Reports)

• The Data, Research and Services revenue surged 14% to $33.0 million in FY15 as compared to fiscal year of 2014, driven by Livemarket and Livetrade products. Redbook Australia maintained double digit growth during FY15, while dealer services was on track. The finance and related services revenue reached $59.4 million. The display revenue improved by 3% on a year over year basis to $60.6 million in FY15 as the Initiatives of direct relationships with advertisers and OEMs paid off. Proprietary data, analytics and insights showed solid levels of engagement, and the group intends to continue on its display products.

• International Segment Performance
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• Although International business represents just 10% of its overall revenues, the group is improving its revenue growth across its geographies. The underlying 2015 fiscal revenue surged 31% yoy to $24.9 million. The dealers’ network rose through customer acquisitions as well as increased yield from September dealer price upsurge. Display revenue improved on the back of new OEM market entrants. The group also improved its EBITDA margins for its international business to 63.7% in FY15 from 51% in last fiscal year.

      
      
      International Portfolio (Source: Company Reports)

• Latin America performance: WebMotors in Brazil posted a strong revenue increase of 20.5% in FY15 to BRL 87.7 million, as compared to pcp, boosted by private and display segments. However, the reported EBITDA fell 16.3% yoy to BRL 23.5 million against pcp, as the group incurred costs for its marketing and technology efforts, coupled with one off head office relocation costs and adjustments related to the Meucarango acquisitions. The inventory levels rose 16% yoy due to Meucarango, Compreauto and WebMotors business. The unique visitors for desktop and mobile also soared 27% and 68% as at April 30, 2015 as compared to pcp. Meanwhile, CAR also estimates that its FY15 investments would pay off and accordingly forecasts a better profitability and margins by next financial year.
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• Financial Overview (Source - Company Reports)
• Mexico highlights: With Mexico being the second largest economy in Latin America and internet users of over 59 million, Carsales is aggressively investing in Mexico to leverage the huge potential opportunity from the region’s online auto classifieds market. The first quarter of 2015 new car sales volumes in Mexico surged 22% year on year, driven by rising employment, improving consumer confidence and vehicle affordability. Moreover, carsales recently acquired 65% stake in SoloAuto, a leading Mexican automotive classified site. The group would be investing up to USD 9 million which includes a working capital investment.  By this acquisition, carsales will get access to solid SoloAutos team and will be well positioned to leverage the booming Mexican markets. The group estimates to finish the agreement by first half of 2016.
   
  Outlook
   
• CAR’s stock had delivered modest returns of over 149%, in the last decade against the broader S&P/ASX 200 returns of 16.5%, and delivered around 98% in the last five years as compared to S&P/ASX 200 returns of 20.1%, However, the shares have been under pressure, posting a negative returns of 10.5% in the last fifty two weeks, due to moderate performance of its core online advertising revenues. Even for FY15, data & research and International segments reported better growth as compared to its core online advertising. Therefore the stock corrected around 8.2% in just last five days as the group’s FY15 performance was below the investors’ expectations.
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• CAR Daily Chart (Source - Thomson Reuters)
   
• On the other hand, the group reported that it had been witnessing a strong domestic trading conditions during the starting six weeks of 2016 fiscal year. CAR believes that its investments in Stratton, tyresales and Auto Inspect would start delivering in the coming fiscal years. Carsales along with Stratton acquired 20% of the Ratesetter business for about $10 million.  Ratesetter is a financier which would provide brilliant synergies for short term or low priced vehicle finance, and the group expects to reflect the synergies of this acquisition from 2016 financial year. Meanwhile, CAR acquired 50.1% stake in Auto Inspect, which is into mobile vehicle inspection and verification services during June 2015. Carsales estimates to derive more traction in the coming years with the growing consumers concern on vehicle quality. CAR is also focusing on developing its international business models in Korea and Brazil, which would improve its earnings in these areas. CAR acquired SoloAutos in Mexico, iCar Asia and SK ENCARSALES.COM, as well as purchased a stake in Webmotors, which would contribute to the group’s international performance for themedium and longer term. Moreover, Carsales remains among the most preferred online destination in buying as well as selling cars in Australia. We believe that the recent correction is a perfect opportunity to investors to enter the stock, given its strong growth potential. The stock is also trading at reasonable valuations and delivered a return on equity of around 49.9%. Based on the foregoing, we give a “BUY” recommendation to the stock at the current price of  $9.73.

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