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Carsales.Com Ltd – Hot Stock in Our Watch list

September 28, 2015 | Team Kalkine
Carsales.Com Ltd – Hot Stock in Our Watch list

Journey Ahead and Results announcement for FY 2015


 
Rather surprisingly, share prices fell on the release of the results for the year ended 30 June 2015. This was despite the record results achieved by the company though the decline created a buying opportunity for long-term investors. Some of the major highlights of the results were a 32% increase in revenue over the previous year to $ 311.8 million, a 12% increase in EBITDA to $ 154.3 million, an EBITDA margin of 50% reflecting the acquisition of Stratton Finance and an increase of 12% over the previous year in pro forma operating cash flow to $ 112.9 million. The Board of Directors declared a final dividend for FY 2015 of 17.7 cents per share fully franked plus a special dividend of 1.4 cents per share fully franked taking the total paid for the year to 35.3 cents per share.
 

Revenue and EBIT (Source: Company Reports)

The Chairman's update pointed out that the year was characterised by continued innovation in core business, the expansion into adjacent domestic markets and the tremendous progress in the global investment portfolio. Domestically, the new car market continues to be buoyant with more than 11 million new cars sold in calendar year 2014, and 2015 is on track to exceed that number. The company has made significant investments in relationships with OEMs and dealer customers during the year and has delivered significant improvements in the product portfolio in all verticals. It is the market leader in auto classifieds and continues to increase its lead over its nearest competitors.
 
The 50.15% acquisition of Stratton Finance, a leading finance broker and services provider in July 2014 was the most obvious example of expansion into complementary markets and the performance after acquisition has been above expectations. More activity is expected in FY 2016 on the acquisition front. Products launched during the year such as Instant Offer and the continued expansion of tire sales continue to provide diversification and create engines for strong future growth. The acquisition of 50.1% of Auto Inspect, a leading vehicle inspection business will provide customers with added value and greater confidence in making vehicle purchases.
 
The international businesses have shown pleasing growth and resilience during the year. Webmotors (Brazil) has shown strong revenue growth despite the challenging economic scenario and the added distractions of a World Cup, controversial federal elections and a decrease in new car sales. Skencarsales (South Korea) has grown profitably while transforming its own business despite the outbreak of MERS and is now well placed to benefit from the positive trends in the market. The company management team has spent a lot of time working with the local managements and it is gratifying to see that these effects are bearing fruit. The chairman also summed up by saying that there was no point in being an interesting number two when you need to be a compelling number one.
 

Apple Watch App (Source: Company Reports)

Financial highlights

There were a number of domestic highlights which contributed to the overall performance of the business. Dealer revenue was up 7% over the previous year and the key growth drivers were yield and growth in premium advertising products. Private revenues grew by 8% with positive yield growth through price increases, growth in premium products and strong growth in the B2C segment. The non-automotive verticals are performing well and Mediamotive is up by 3% over the previous year despite the challenges in the market. Data, Research and Services registered a strong performance with a 14% increase in revenue over the previous year. Finance and Related Services registered revenues of $ 59.4 million primarily because of the acquisition of Stratton Finance. Stakes were acquired in Ratesetter Australia Pty Ltd (peer-to-peer lending) and Auto Inspect Pty Ltd (vehicle inspections) which will be drivers of future growth.
 

Financial summary (Company Reports)

As regards international highlights, the company holds interests in online automotive advertising companies operating in markets with high growth. These include 49.9% of the equity of Skencarsales Ltd (South Korea), which is the number one online automotive classifieds company in South Korea. The company also holds 30% in Webmotors SA (Brazil), the number one online automotive classifieds company in Brazil; and 20.2% in the equity of iCar Asia Limited, which is the largest online automotive classified network in South-East Asia, and is the number-one site in Malaysia and Thailand and the number two site in Indonesia. Further, market expects iCarAsia to witness profitability with AUD 24 million in cash post the capital raising and provision exercised by Carsales.com. SK Encarsales showed strong revenue growth of 31% over the previous year largely as a result of growth in dealer yield, customer acquisition and display revenue. The company started charging for private adds in April 2015 and expanded EBITDA margins from 51% in the previous year to 64% and the company's share of net profit after tax was $ 4.73 million. Subsequent to the end of the financial year, the company announced on 9 August 2015 that it had agreed to acquire a controlling shareholding of 65% in SoloAutos, a leading automotive classifieds website in Mexico for an investment of up to USD 9 million.
 

Sales and EBITDA growth

A large portion of the sales growth came from the Finance and Related Services segment, consisting of 50.1% of the Stratton Finance business. The business, which provides innovative vehicle finance arrangements (amongst other related services), contributed $59.4 million of revenue, without which group revenue would have only grown at 7% year-on-year. Revenue from Online Advertising, which is the core business, grew by just 6.2%, while EBITDA from the segment grew by only 1.5%. The company said that 1.1 million new cars had been sold domestically during the 2014 calendar year with that number set to be exceeded in 2015. Meanwhile, EBITDA shrank in the company's International and Data and Research businesses. The group’s overall EBITDA margin fell from 59% in the previous year to just 50% for FY 2015.
 
Income investors would have been cheered by the hike in the dividend. We note that the company is committed to strengthening its already dominant position in the core Australian market while looking for other opportunities to provide value for investors both domestically and internationally. The company reports that domestic trading conditions in the first six weeks of FY 2016 remained solid and EBITDA margins are expected to be maintained at the current levels. At the international level, subject to trading conditions in the market being maintained, the company expects to see solid growth in earnings. We believe that there is an upside to the current stock price and accordingly rate this stock as a Buy at the current price of $9.83.


CAR Daily Chart (Source: Thomson Reuters)

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