For the third biggest company in the S&P/ASX All Technology Index, the chart of Carsales.com’s (CAR) share price doesn’t look like a technology company. In a long-term uptrend, it has proven to be remarkably steady despite the massive sell off in tech stocks.
Carsales.com has been in the news lately because it is undertaking a capital raising to fund the purchase of an additional 40% of Webmotors, the number 1 online auto marketplace in Brazil. Upon completion, Carsales.com will own 70% of Webmotors.
Founded in 1997, Carsales.com is the number one online automotive classified business in Australia with a growing global presence in Asia and Latin America. Carsales.com also operates a number of market leading websites in non-automotive verticals including motorcycles, boats, caravans, trucks and heavy machinery.
Carsales.com has four major operating segments:
- Australia – the leading digital car marketplace with carsales.com, which accounts for 50% of the Group’s revenue. Dealers contribute about half the revenue, private buyers about 25%, with the balance coming from media and data and research services;
- United States – through Trader Interactive, which provides marketplaces for RVs and commercial vehicles, approx. 30% of Group revenue;
- South Korea – through Encar, approx. 13% of Group revenue; and
- Carsales investments – through adjacent investments in companies providing inspections and tyre services – approx. 7% of Group revenue.
Webmotors will be the fifth segment. On a proforma basis it will add about $101m in revenue. Post the acquisition, the mix between Australian and international revenue for Carsales.com will be 47%/53% and on an EBITDA basis, 53%/47% respectively.
Carsales.com has delivered year on year revenue increases in each of the last 15 years, growing at a compound annual growth rate (CAGR) of 15%. Over the last 5 years (taking data from the first half), revenue has grown at a CAGR of 9%, EBITDA at 12%, net profit at 20% and EPS (earnings per share) at 10%.
Perhaps one of the most impressive parts of the Carsales business is that it is a very high margin business. Overall, it keeps 54.4c of every $ of revenue (before interest, tax and depreciation). In Australia, the margin is even higher at 64.1%.
Its strategy is based on market leadership in digital classified advertising markets of material size, building a compelling ecosystem of services that support customers through the buying, selling and ownership of vehicles, and leveraging consumer insights and industry trends to explore new opportunities. This is enabled by data analytics, people and technology.
Key priorities include increasing the digitisation of the vehicle buying and selling process, dynamic pricing and connecting advertisers to the Carsales audience through sophisticated data products.
With Webmotors in Brazil, Carsales.com is increasing its ownership from 30% to 70% by paying A$353m for the 40% from its partner, Santander Bank. The latter will continue to own 30% and be the provider of finance to Webmotors’ customers through its auto loan facility.
Founded in 1995, Webmotors is the leading online auto market place in Brazil. It has delivered compound annual revenue and EBITDA growth of 23% and 28% respectively since 2017. Carsales acquired a 30% interest in Webmotors in 2013.
Brazil is the fifth largest automotive market in the world with 78 million cars in use and ownership per capita increasing as the economy develops. The 28,000 car dealers are disparate and fragmented, meaning that the Brazil market (for Webmotors) is underpenetrated and there is a monetisation opportunity. With clear audience leadership, its ongoing partnership with Santander and a pipeline of growth initiatives, Carsales argues that there is a clear opportunity to drive revenue growth and increase Webmotors EBITDA margin (which is currently around 40%).
The acquisition is being funded through a capital raising of $500m. After acquisition and transaction costs, the balance of approximately of $133m will be used to strengthen Carsales’ balance sheet by repaying debt.
The acquisition is expected to be EPS (earnings per share) neutral for Carsales in the first full year after completion, and accretive thereafter.
What do the brokers say?
The brokers are positive on the company, as set out in the table below. According to FN Arena, the consensus target price is $25.12, 14.7% higher than Friday’s closing ASX price of $21.90. The range of target prices is a low of $23.00 from Ord Minnett (Morningstar) through to a high of $27.00 from Morgan Stanley.
On multiples, the brokers have Carsales trading currently at 29.0 times forecast FY23 earnings and 25.4 times forecast FY24 earnings. Its prospective dividend yield is in the range of 2.7% to 3.0%.
The acquisition of Webmotors is given the “tick of approval” by the brokers. FN Arena’s precis of Morgan Stanley’s research note encapsulates the general feeling:
“Morgan Stanley likes Carsales’ acquisition track record and notes the company well understood the Webmotors business before increasing its stake. Moreover, market feedback suggests that the US/global car market is robust and de-synced from the broader economy during covid, with OEM supply still lagging. Industry view attractive”.
Bottom line
I like companies that have market leadership positions. I also like companies that have proven track records. Carsales.com passes both tests.
A forward multiple of 25.4 for FY24 feels a touch pricey, but compared to REA (the operator of realestate.com.au, the leading digital marketplace in real estate), which is on a multiple of 39.0 times forecast FY24 earnings, CAR looks reasonable value.
Buy. And for existing shareholders who have an entitlement to buy new shares at $19.95 each, it is most certainly a buy. The entitlement offer closes at 5.00pm this Thursday, 30 March.
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.
