We recently researched CAR Group (ASX:CAR) in The Dynamic Investor. With the shares having re-rated strongly since our recent report, we consider whether current levels still present an entry opportunity.

About CAR Group

CAR Group (formerly Carsales.com) is the largest aggregator of online automotive classified advertising in Australia. In addition to its domestic operations, the Company has interests in leading international automotive classified businesses, mostly in Korea (100% interest in Encar) and Brazil.

The Company has expanded into non-automotive classifieds, via the acquisition of Trader Interactive (TI), which is now 100% owned.

Key Fundamental Drivers

Strong Growth in Key Metrics for Domestic Business

For the six months to 31 December 2024 (1H25), the domestic business reported revenue growth of 9% and a slightly improved EBITDA margin of ~65% (vs 64% in 1H24). Across each of the product lines, online advertising revenue of ~$207m was up 9% on 1H24. Dealer revenue growth of 10% was also a key driver and was achieved on the back of increased lead volumes, yield and depth penetration.

Of the 10% revenue growth in the Dealer segment in 1H25, half was due to yield, with the other half from volume. This likely infers a small increase in CAR’s take rate of dealer gross margins in 1H25. CAR is likely to continue to increase its take rate of dealer gross margins over time. Having said that, there is risk to CAR’s near-term pricing aspirations if Dealers’ gross margins come under further pressure.

There is potential for yield expansion following the launch of the new consumer to Consumer (C2C) platform in Australia in October 2024. Although earnings benefits from the C2C platform are not expected in the short term, the product could potentially be launched into international markets in time.

Are Market Concerns About Trader Interactive Valid?

By way of background, Trader Interactive (TI) operates a portfolio of 10 US online classified sites but focus on four main segments:

i. Recreational vehicles (key brand is RVTrader.com). Trader Interactive is a clear #1 in the recreational vehicles vertical, with 6x more audience than the nearest competitor.
ii. Motorcycles (key brand is CycleTrader.com), where Trader Interactive is a clear #1 in the motorcycles vertical.
iii. Trucks (key brand is CommercialTruckTrader.com) where Trader Interactive is #2.
iv. Equipment (key brand is EquipmentTrader.com) where Trader Interactive is #2/3.

One of the key negatives from the 1H25 result was that TI growth was slightly lower than expected. This was due to a delay in the price increase in North America. This resulted in TI’s revenue growth slowing to +9% in constant currency terms (on a year-on-year basis), from +11% in 2H24.

In addition, revenue growth guidance for TI was lowered to ‘solid’ vs. ‘good’ previously. The price rise is now expected in the current quarter (4Q25). The market’s concern regarding the delayed price increase is that CAR may have lesser pricing power that initially thought, especially in the context of the broadly flat dealer numbers over the last 12 months. We consider that the delayed price increase will have a largely immaterial impact on the rate of revenue growth for FY25 (~1-2 percentage points), with the delayed price increase more of a timing issue.

The delay is also sensible from the viewpoint of aligning with the seasonal recovery of the recreational vehicle market and maintaining goodwill with dealers. The latter is necessary to prevent dealers moving off Trader Interactive platforms. Overall, there is relatively low risk of churn risk due to price increases in RVs given RVTrader’s strong market position.

Moving forward, the medium-term double-digit growth opportunity for TI is underpinned by: i) The ramp-up in new lead model, ii) Stronger agent relationships facilitating price increases, iii) Continued depth penetration; iv) Strong media revenue; and v) Better consumer confidence from a series of interest rate cuts.

In terms of EBITDA margin, this is expected to be flat over the medium term, reflecting i) Increased investment in the sales team to reflect dealer feedback; and ii) Increased marketing to increased brand awareness, especially for the Private segment, as Facebook marketplace seems more popular and relevant in the US.

Balance Sheet Remains Moderately Geared

Gearing (on a net debt to equity basis) as at 31 December 2024 remains prudent at 1.8x. The current gearing level is flat compared to 1H24 and below a recent peak of 2.5x as at 31 December 2022. Gearing had been elevated during the latter period due to incremental debt drawn down to fund the acquisition of the remaining 51% of Trader Interactive.

We expect stronger levels of free cashflow to support a gradual reduction in gearing. To this end, CAPEX remains modest (~10% of revenue on the last three periods) and continues to support several growth initiatives.

Fundamental View

CAR shares are currently trading on a 1-year forward P/E multiple of ~33x, which is in line with the average of ~33x over the last two years and in the middle of the trading range over the same period (29-37x). Historically, CAR shares have presented value when its trading multiple is at the low end of its usual trading range.

Charting View

CAR made a large bullish reversal in early April, right on the long-term trend line. However, it is now hitting a resistance line and this means that we could see some short-term weakness from here. CAR is therefore a buy on any dips.

 

Michael Gable is managing director of Fairmont Equities.

 

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