The share price of Carsales.com (ASX:CAR) has fallen in the two weeks since we last reviewed it. Is it now time to buy the dip?
Carsales.com is the largest aggregator of online automotive classified advertising in Australia. In addition to its domestic operations (which account for over 75% of group revenue), the Company has interests in leading international automotive classified businesses, mostly in Korea and Brazil.
Key Investment Considerations
Strong Outlook for Domestic Businesses
The key driver of the FY18 result was the build-up in revenue momentum as a result of depth products for both Dealer Advertising and Private Advertising. This is likely to extend into FY19. Qualitative guidance for FY19 provided by CAR indicates that it expects the domestic business to remain ‘solid’. In particular, the Company is well positioned to benefit from:
i) An acceleration in car dealer depth penetration,
ii) Continued volume growth and
iii) A strong pipeline of new products due to launch in FY19, which should help lift average yields per customer.
Is the Company Exposed to a Drop in New Car Sales?
Prior to the FY18 results, there were some market concerns in relation to soft macroeconomic data. In particular, negative new car sales in July 2018 (-7.8% compared to July 2017). There is some conjecture around the correlation between the movement of new car volumes and used car volumes. Notwithstanding the potential impact from declining new car sales (-1.5% in August 2018 and -5.5% in September 20181) the Company’s ability to navigate through challenging macro conditions is demonstrated by increased demand for premium listing and promoted product, the ability to implement price increases, the likely revenue uplift from cost investments recently undertaken and an increasing contribution from international operations (which currently contribute ~10% of FY18 group revenue) as these businesses mature.
The FY18 results showed evidence of momentum in each of the international businesses. CAR expects ‘solid’ revenue/earnings growth in Korea (SK Encar), but strong local currency revenue/earnings growth in Brazil.
CAR indicated at the FY18 results release that SK Encar has multiple growth opportunities. The Company is well positioned to leverage off this given the recent move to full ownership of SK Encar. These include dealer yield growth from a combination of price rises and volume growth in promote and guarantee services; higher display revenue; extended warranty vehicle services; dealer finance products and services; and instant offer trade ins for dealers.
In addition, in Brazil business (Webmotors, in which CAR has a 30% stake), both dealer revenue and display revenue grew strongly in FY18.
Capacity to Pursue Acquisitions
In early July this year, the Company entered into new debt facility agreements, ($545m in committed funding) that the Company can used to fund any further acquisition opportunities. This includes increasing its stake in present international investments. The Company has typically strong cashflow that enable it to service higher levels of debt.
Fundamental View of Carsales.com
The shares are currently trading on a 1-year forward P/E multiple of ~22x, which is slightly below the long-term 1-year forward P/E multiple of ~23x. We do not consider this to be over demanding in light of the forecast for double-digit EPS growth over the next three years. Given the recent sell-off in line with other growth stocks across the market, we consider CAR may well be worth considering from a value perspective.
Charting View of Carsales.com
Although CAR has been trending up for a number of years it has spent much of 2018 trading in a range. That range appears to have an upper limit near $15.50. However, volume has been increasing on the way down during the last few weeks, and that is not a good sign. Support is back near $13 – $14. We can’t be confident of the stock making much progress until it can make a weekly close above resistance near $15.50. However, given that it is at the bottom of the range, some investors may wish to use this as an early entry point. A break of support would be a negative. That is, if CAR is trading in the $12’s again, then that would be a worrying sign from a charting perspective.
Michael Gable is managing director of Fairmont Equities.
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