Of particular note amongst outperforming companies over the past few years has been the performance of some of the biggest and best online list providers in Australia, and the fact that Realestate.com.au (REA), Seek Limited (SEK) and Carsales.com.au (CRZ) all again reported excellent trading results in this year’s half-year reporting season, has not escaped our attention.
By way of comparison, below we have compared the share price performance of all three businesses to the S&P/ASX 200 All Ordinaries Index (XAO) over the past two years. Similarly, what we find is that their individual business performance continues to be translated into admirable share price out-performance, especially considering all the doom and gloom in the media about the death of manufacturing, mass retrenchments, soaring unemployment and even wars that look set to break out.
Let’s focus on the business, which has made a number of strategic investments over the past 12 months, and whose prospects for the future are equally today as bright as they ever have been.
Carsales.com.au
According to VFACTS [1], in 2010 nearly one million new cars were sold in Australia. In 2013, this figure has climbed to over 1.1 million, which means amongst Australia’s 20 million adult population, 5.5% buy a new car every year. That’s a lot of turnover.
One also suspects that just as many, if not more, secondhand cars are turned over as well, and the dominate online player that is leveraged to this industry without having to buy stock, lease a showroom or pay the wages of mechanics is Carsales.com.au (CRZ).
Carsales is Australia’s largest and dominant online list of cars, with about 225,000 units available for sale as of February this year. Its next closest competitor is Carsguide with 114,000 cars, which makes Carsales about twice the size of its nearest competitor, in terms of new and used cars listed for sale. An advantage the business appears to be holding and if anything, is growing.
Carsales also continues to grow its share of auto-related browsing and almost all other measures we can find – be that revenue, profitability, share of consumer browsing, share of total page views, or by page views per vehicle (directly correlated to lead generation volumes) – show that CRZ is extending its lead, reach and share of mind. All of these point to CRZ remaining the dominant leader in web-based automotive classifieds, and competitors are floundering to even maintain contact with them.
The Carsales website is a lead-generation tool for dealers and car owners alike. Dealers might pay $40 per enquiry received, and there are typically five enquiries per car. It therefore costs a dealer about $200 in advertising to sell a car on Carsales.
We have learned from discussions with the company that dealers can be expected to make a gross profit of between $1500 and $4000 per car, and for luxury cars, about $6000.
There is clearly room for dealers to absorb the $200 they currently pay Carsales, and arguably there’s scope for them to pay more.
The ability to charge more should be enhanced by two known facts, first; one manufacturer was recently reported to have experienced a 30% fall in new car sales when they removed their brand from the Carsales website, and secondly; Carsales leading market share (share of total page views is now at an all-time high of 79.5%) means dealers are all but forced to adopt the Carsales network to obtain qualified leads.
Growing share combined with rising private inventory growth, display advertising growth, the potential for dynamic pricing, as well as the prospect of additional future products, affords the company the opportunity to significantly grow earnings for the foreseeable future. And none of the aforementioned opportunities include any overseas potential.
Offshore opportunities
Whilst Carsales continues to grow, albeit at a slowing rate in the Australian market, for a business which at this same time last year had no assets offshore, the investment of $234 million in just the past 12 months signals a radical change in business strategy. It’s globally where management is clearly intending the next leg of growth to come from.
Carsales has invested the funds as follows: $20.4 million for a 22.9% stake of ICar Asia (Thailand, Malaysia and Indonesia), $87.7 million for a 30.0% stake of WebMotors (Brazil) and $126 million for a 49.0% of SK Encar (Korea). And with it, Carsales has laid claim to the title of the world’s fastest-growing auto advertising portal.
In doing so, it has also created a platform of high quality market leaders, all with upside potential from being exposed emerging market plays, which are collectively seven times the size of the Australian market in terms of vehicle sales volumes.
Think about the potential here for a moment…
Source: Southern Sea Ventures
Brazil is the fourth largest car market in the world, and growing at circa 30% a year is profitable to the Carsales group. Their recent acquisition in South Korea is a market that is 60% larger than the Australian market and is also profitable. ICar Asia is currently unprofitable. But as a start-up operation, it’s growing fast, with unique monthly visitors increasing from 1.5 million to 4.5 million in the past 12 months alone.
Carsales has literally gone from nothing to significant ownership and a presence in all meaningful motor vehicle markets in Asia and now operates in markets representing roughly 10% of global vehicles in use, and 11% of global new cars sales.
Excluding Australia, these markets are primed for growth, based on vehicles per capita moving towards the developed world average of 60-70%, versus their current average of 25%.
Earnings growth
Should management be able to replicate the same success as they have with Australian Auto Classifieds, then based on a 50% return on equity (ROE) over the next 5-10 years (for example) on just the $234 million incremental capital invested to date (we expect more will follow), this could equate to an additional $117 million in after-tax earnings in the years ahead.
That’s more than double the business’ current level of earnings and therefore, we certainly believe for the moment it’s a business that has underlying fundamentals that are hard to ignore. Fundamentals, of course, that are all pointing to very bright prospects in the years ahead.
To that end, we rate Carsales in the top 2% of all listed business, and are current holders in The Montgomery [Private] Fund and The Montgomery Fund. Notwithstanding someone being willing to buy our stake for an irrationally exuberant price, our funds and our investors should expect to be holders for many years to come – so please continue to make all your online car enquiries there.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
Also in the Switzer Super Report:
- Charlie Aitken – Still banking on Queensland [2]
- Staff Reporter – Buy, Sell, Hold – what the brokers say [3]
- Fundie’s Favourite – Domino’s delivers for shareholders [4]
- Penny Pryor – Short ‘n’ Sweet – the mining giants [5]
- Tony Negline – What to do when all SMSF trustees die [6]
- Questions of the week – Worley Parsons and BHP – buy, sell or hold? [7]