Can this Aussie digital marketplace continue to successfully drive global sales?

Whether you are selling or buying a car – or doing both – there’s really only one place Australians head to. Carsales.com. There’s little in the way of competition locally, and even car dealerships have embraced the use of the digital marketplace. The business has also significantly expanded its reach globally, through careful acquisitions in key markets.

That said, it hasn’t been an easy time over the past few years. Supply and demand have been a significant challenge in the past few years, from the COVID pandemic to chip shortages (which reduce the supply of cars that can be sold) and more recently, the excess inventory piling up in dealerships.

Despite the challenges and relatively flat guidance for margins in FY25, fund managers on Livewire have generally been positive on CAR Group (ASX: CAR) and its structure. Auscap Deputy Portfolio Manager Will Mumford has been no exception. Find out in this wire whether Mumford still holds that view.

Car Group FY24 Key Results

• Revenues +41% to $1.1 billion
• Earnings before tax, depreciation and amortisation +42% to $568 million
• Net profit -61% to $250 million
• Monthly unique audience of 48 million, 2.6 million vehicles online
• Adjusted earnings per share +17% to 91.3 cents/share
• Final dividend per share +18% to 38.5 cents/share

FY25 Guidance: Good, solid, and strong

• Expecting similar Adjusted EBITDA margins for FY25 for Australia
• Project growth in revenue and similar EBITDA for investments in FY25
• Strong growth predicted for Latin American revenue and EBITDA (and good growth in North America and Asia)
• For more financial data on Car Group, head to Market Index.

Note: This interview took place on Monday 12 August 2024.

1. In one sentence, what was the key takeaway from this result?

CAR Group’s FY24 result matched the market’s high expectations, delivering very strong financial and operational metrics across all key markets, with management pointing to continued momentum into FY25. 

2. Were there any major surprises in this result that you think investors should be aware of?

The key takeaway is how strong CAR’s result was across the board. In all four major markets (Australia, North America (Trader Interactive), Latin America (webmotors) and Asia (Encar)), CAR grew both revenue and EBITDA by more than 10%. 

Importantly, CAR Group’s guidance for FY25 is again pointing to good growth in all four markets, with management confident the runway for growth beyond FY25 remains significant, particularly in international markets. 

CEO Cameron McIntyre said CAR has “never had more growth levers than we have today”. Management’s confidence in the North American growth outlook has also been taken particularly positively, as some analysts ahead of the result had been worried about the impact of cyclical macroeconomic headwinds on the business.

Management’s guidance of flat EBITDA margins was another key focus area ahead of the conference call. However, management reiterated their expectation of long-term margin expansion, with the temporary pause in margin expansion being driven by strong growth opportunities in the Asia and Latin American markets, where management is currently prioritising revenue growth over margin expansion. 

3. Would you buy, hold or sell this stock on the back of this result?

Mumford's rating: BUY

In the Australian market, Carsales continues to have material room for pricing growth and margin expansion. It also continues to launch new products with large incremental profit margins which further enhance its competitive position, with secure consumer-to-consumer (C2C) payments, in-app messaging as well as AI photo assistance being some recent examples.

We think that CAR Group is still in the relatively early stages of rolling out its Australian intellectual property into its offshore markets. CAR Group’s customer wallet share is materially lower internationally relative to Australia, its product set is more limited internationally and the combined EBITDA margin of these international regions is 15% below what CAR is achieving in Australia. These businesses have significant growth potential as CAR rolls out its scaled IP and technology. 

CAR estimates that these markets have a combined market size that is five times the size of Australia, but they are only currently making the same EBITDA contribution combined as Australia. 

With an improved balance sheet, further accretive inorganic growth also remains a possibility. 

CAR Group has delivered roughly four times the EPS growth of the ASX All Ordinaries Index over the last decade at a much higher return on tangible equity. We think this strong growth will continue for some time. 

4. Are there any risks to this company and its sector that investors should be aware of?

Interestingly, the market was concerned regarding macroeconomic headwinds in North America ahead of the result. A key change to CAR Group today relative to five years ago is that its end market diversity makes it a potentially less cyclical business. 

Whilst North American macroeconomic conditions have been soft recently, this has been offset by strength in Brazil and South Korea.

5. From 1-5, where 1 is cheap and 5 is expensive, how much value are you seeing in the market right now? Are you excited or are you cautious about the market in general?

Rating: 3

I think most responses tend to conclude the market is expensive and with the ASX All Ordinaries trading on an above-average forward P/E multiple of 17.4x, I can see why! But I’m still going to go with 3/5 for two reasons.

Firstly, I think the index multiple is being partly driven by a re-rate in large index weights like CBA, and there are plenty of stocks within our portfolio that are trading either in line with or below their long-term historical average multiples.

Secondly, whilst valuations are important, it’s no certainty that an above-average starting valuation multiple conclusively means that an Australian investor investing in the Australian equity market with a medium-term time horizon won’t receive a respectable after-tax return. 

It’s worth noting that according to FactSet, the ASX All Ordinaries peak forward P/E multiple was 19.9x in November 2020, but those who bought that month are still up 42% since then, compounding at a very respectable 10%. So sometimes the “expensive” mistake can be sitting on the sidelines of an “expensive” market waiting for a correction. 

Ultimately we prefer to consistently own a selection of the highest quality businesses that we are confident will compound earnings at attractive rates across market cycles.

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