Carsales is set to benefit massively from the acquisition of Trader Interactive. With such an inflated PE ratio and relatively low growth, we see CAR as overvalued. The massive increasing debt levels are also a concern for us.
Should I Buy Carsales Shares? Here’s our analysis.
Should I Buy Carsales Share Price
Carsales has fully recovered from the devastation of the COVID crash, with their share price rocketing to record highs. At the time of writing, ASX: CAR is priced at $22.05. Their share price is up 16.91% over the last 6-months and 19.02% over the course of a year. Although this sounds impressive, the results have actually underperformed the market which is up 21.73% in the last year.
CAR’s share price 52-week range is 16.72-22.09.%. Those who managed to grab shares at its low during the COVID crash of 2020, would have enjoyed a 133% increase from trough to peak.
ASX: CAR’s market capitalization is currently $6.1 Billion. Over the last 10-years, investors have made 391.12% in capital gains.
About Carsales Shares
CAR’s Principal Activity is an online digital platform to buy and sell cars, bikes, and other vehicles. They also offer online advertising services, data, research, finance, and other related services.
Founded in 1997, Carsales.com Ltd is the number one online automotive classifieds business in Australia with a growing global presence in Asia and Latin America, employing 1200 people globally. Carsales.com Ltd also operates a number of market-leading websites in non-automotive verticals including motorcycles, boats, caravans, trucks, and heavy machinery. Source, Carsales
Asides from the obvious Carsales.com, they also own a network of transport brands.
Across their websites, they generate an audience of 4.35 million unique visitors a month, with an average on-page time of 31 minutes. They also averaged around 573,000 listed cars globally at any time.
Carsales is monetized primarily through their advertisement fees.
For private customers:
- Cars below $5000: free
- Cars $5000-$15,000: $68
- $15,000-$20,000: $75
- $20,000-$30,000: $85
- Above $30,000: $95
- Premium ads: $135
- Concierge ads: $300.
In their below revenue breakdown, we can see a substantial amount of their revenue is generated from dealers. With a further $44.3M and $28.8M from private sales and media respectively. Across their business we see Asia has substantial growth. Media describes the advertisement of new cars funded by car manufacturers.
Carsales Shares Dividend History
CAR shares typically announce a dividend with the release of its half-yearly results in February and full-year results in August as seen in their financial calendar. Dividends are typically paid twice a year, in March (Interim Dividend) and September (Final Dividend).
CAR shares have paid a dividend every year since 2010. This includes the 2008 GFC and COVID recession. CAR shares pay dividends that are fully franked. The current average yearly dividend for CAR shares is 50c giving them a net yield of 2.27% or a gross yield of 3.24% at the current share price.
CAR’s current dividend payout ratio is 112%, meaning they are paying out more in dividends than net profits. This is obviously not sustainable and we expect their dividend payout ratio to return to a more modest 75% this year.
Should I Buy Carsales Shares for their Dividend?
Based on their current yield Carsales does have a decent dividend yield of 2.27%, or a grossed up 3.24%. This seems attractive compared to the average term deposit yield of 0.4%. Carsales yield is exactly in line with the current ASX 300 market average.
We never purchase a company based solely on their dividend as this is often not a reliable metric for overall performance. Not all dividend stocks are solid investments. A massive dividend yield can be a red flag as it may be altered due to a massive fall in share price, poor prospects, or a special one-off dividend. For this reason, it is important to consider the business as a whole.
One high dividend stock that we like is CBA. CBA has a gross yield of around 4.25, and a strong balance sheet to support this. You can have a read of our CBA dividend report here.
Should I Buy Carsales Shares: Investor Sentiment
After surveying 112 Investors about their current CAR shares sentiment: BUY-HOLD-SELL, as well as their target price over the next 12-months here are the results;
The results from this survey show there is currently a strong Bullish investor sentiment on CAR shares. So how much are CAR shares worth? Let’s get into it.
Have your say on Carsales Shares:[wpforms id=”8510″ title=”false” description=”false”]
|Volume 4W Avg||1,187,300|
|NTA per Share||-$1.34|
Based on their current share price we can see Carsales shares have a PE of 48.38x, which is far above the current inflated average of 20.8x. A company with a high PE could be seen as overvalued or that investors are expecting large growth in the future. They can also be seen as riskier.
Current Carsales shares sit in the high PE band.
Carsales share is a mid-cap company with a total market capitalization of just over $6 Billion. This places it as the 85th largest listed ASX company by market cap. For a company of this size, we expect to see an established company in the process of expanding in industries that are expected to experience rapid growth. Because they don’t tend to be as established as large-cap companies, they generally involve a higher level of risk.
Carsales current Beta is 1.03. Beta is a measure of a stock’s volatility in relation to the overall market. High Beta stocks are said to be riskier but provide higher return potentials, Source: Investopedia.
Earnings, Debt, and NTA per Share:
We can see Carsales shares currently have earnings per share of 44.4 cents, this gives it its currently inflated PE of 48.38x. Another way of looking at this is only 2% of their share price is backed by solid earnings. This makes us realize at the current conditions their net dividend yield of 2.27% is unsustainable until earnings increase. They also have a significant amount of debt of $467.205 million, giving them a negative Net Tangible Assets per share of -$1.34.
Carsales being a mid-cap company poses no real risk of market liquidity in my opinion. We can see the average volume is 1,187,300 or just over $25 million shares being traded daily. There seems to be a healthy number of buyers and sellers.
Carsales is often compared to Seek, and the brick-and-mortar car dealership AP Eagers (APE). We can see compared to Seek, Carsales has more attractive fundamentals with positive earnings and a great ROE, their NTA is comparable. AP Eagers has a more reasonable PE ratio, less debt, but also has a slightly lower ROE.
In February the group released its Half-yearly report. Carsales delivered a strong set of results despite the COVID-19 pandemic, demonstrating the strength of the Australian business and the growth potential of its international markets.
Here are the Half-Yearly highlights:
- Strong double digit earnings growth: Adjusted EBITDA up 18% and Adjusted NPAT up 17%.
- This reflects earnings growth across all financial segments with South Korea, recording EBITDA growth of 30%.
- Strong margin performance with Group Adjusted EBITDA margin of 60% reflecting good operating leverage and a continued focus on cost management.
- Resilient revenue performance with Adjusted Revenue down by 2% with strong growth in South Korea and good growth in Dealer, offset by declines in the tyresales and Media businesses, largely due to the impact of COVID-19.
- Reported Revenue down 7% to $199m, Reported EBITDA up 9% to $114m and Reported NPAT down 14% to $61m. Reported metrics impacted by $11m COVID-19 dealer support package.
Carsales Shares Historic Income Trends:
Carsales Website Search Interest:
We can see from their previous Full Year report, revenues have slightly reduced to $395.6 Million. The company has also managed to keep costs low and has slightly reduced its expenses. As a result, Carsales managed to slightly improve their profit in 2020, from $84 Million to $116.9 Million. Representing an increase of 39%.
We can see Carsales currently have $179.9 Million in cash and cash equivalents in hand. This has almost doubled from their 2019 position. When we analyze this in conjunction with their cash flow statement we can see the company received $147 Million from borrowing (debt).
From their financial position, it can be seen that they do carry a significant amount of debt on their balance sheet (around $544 Million). Obviously, they do record positive net assets of $297.2 million, although subtracting their substantial intangible assets (584.88M) leaves them with net tangible assets of around -$287.68 Million. They later breakdown their intangibles into:
- Goodwill: 477.633M
- Computer Software: 41.182M
- Branding: 65.684M
- Other: 389K
Carsales Shares Debt:
Their current debt position is $544.244 million. This is high representing a debt-to-equity ratio of over 150%. Although at their current income their debt is well covered by earnings. In the past, we have seen Carsales dramatically increase its debt position without a history of paying it down. We like companies with low-to-no debt.
Cash Flow Statement
From the cash flow statement, we see Carsales grew its cash position by increasing debt ($147 million). They also received an inflow of around $4.5 million from the issuance of equity. Despite this, we can see the company still paid out $105.58 million in dividends.
We see this as poor management of capital, although it can be argued this is better for investors as cutting their dividend can influence investor sentiment. Significantly reducing or cutting their dividend would allow the company to further pay down debt, avoid a capital raising, and further finance the growth of the business.
Last year represented an excellent opportunity for businesses to reduce dividends without deterring investors as we saw widespread cuts across the market. Reducing dividends can allow a business to strengthen its balance sheet and fuel the growth of the company, which can be very beneficial for shareholders. We are disappointed Carsales didn’t follow.
In summary, the short-term upside is likely to prevail as long as $20.7 is supported. The alternative scenario is that a downside breakout of $20.7 would call for $20 and $19.6.
Here’s A Breakdown Of The Detailed Technical Factors;
Support and Resistance Graph
Insider Ownership and Trading
Carsales is largely owned by the general public (57.8%) and institutions (29.7%). Individual Insiders own 5.7% of the company. Skin in the game helps ensure the management’s motives are in line with ours. So we use Simple wall St which shows Insider Ownership and Trading very clearly. For large-cap companies insider ownership will be lower, 3-5% is decent.
In 2021 to date there have been a number of tradings by insiders and institutions. We can see purchases from insiders David Wiadrowski (Non-executive director) and Cameron McIntyre CEO of Carsales. Insider purchasing is a positive sign and shows their belief in the future of the company adding value to shareholders.
|18 Jun 21||Sell||$77,410,826||The Vanguard Group, Inc.||3,426,774||AU$22.59|
|18 Jun 21||Buy||$42,289||David Wiadrowski||2,191||AU$19.30|
|15 Jun 21||Buy||$134,605,425||The Vanguard Group, Inc.||6,118,930||AU$22.00|
|24 May 21||Buy||$899,924||Cameron McIntyre||52,972||AU$16.99|
|23 May 21||Sell||$30,401,100||Aware Super Pty Ltd||1,601,110||AU$18.99|
|23 May 21||Buy||$59,141,072||Aware Super Pty Ltd||3,353,492||AU$17.64|
|19 May 21||Buy||$51,458||David Wiadrowski||3,000||AU$17.15|
|25 Feb 21||Buy||$355,092||Aware Super Pty Ltd||18,250||AU$19.46|
Carsales Bookbuild: Raising Capital
In early June Carsales completed their most recent capital raise or “Book Build”. The company states the capital will be used to partially fund the acquisition of a 49.0% interest in Trader Interactive for US$624 million.
The retail component of the Entitlement Offer has raised gross proceeds of approximately A$172 million from the issue of approximately 10.5 million new Carsales shares at an offer price of A$17.00 per New Share. Together with the institutional component of the Entitlement Offer, Carsales has now raised approximately A$600 million.
The total number of shares outstanding increased by 14.8%, over the last year. This is a large amount and may introduce dilution potential.
Trader Interactive is a leading platform of branded marketplaces in the United States, providing digital marketing solutions and services across commercial truck, recreational vehicle, powersports, and equipment industries. Their portfolio of US websites is a clear fit with the Carsales group brand.
Trader Interactive is a profitable business with a strong growth track record. They have an Adjusted Revenue of US$123m and Adjusted EBITDA of US$61m in 2020. In comparison car sales group recorded around US$291.29m revenues and US$86.1m. From these statistics, we can say that 49% ownership of Trader Interactive will be responsible for over 20% of CAR’s future profits.
From these results, we can see CAR purchased ownership in Trader Interactive for an effective PE of 10.23x. By acquiring a profitable company at a valuation lower than their own they will effectively reduce the group’s PE.
Trader Interactive has demonstrated a history of growing revenues and earnings, despite the current challenging economic environment.
Going into the second half of the year Carsales is forecasting moderate revenue growth and solid EBITDA and Adjusted NPAT growth
This reflects higher operating costs in the second half of FY21 largely due to increased investment in domestic and international growth initiatives and the absence of wage subsidies.
Uncertainty remains given the COVID-19 pandemic however traffic has remained solid and private listings have recovered.
The new car market continues to demonstrate signs of improvement as evidenced by new car sales volume growth in December 2020 and January 2021. This has resulted in some improvement in media revenue.
Carsales international business has shown substantial growth. Their recent partial acquisition of Trader Interactive will also allow them a solid market share over US transport digital sales.
Carsales Shares Regulation Risk
Regulation is around predicting the risks or benefits that could be afforded to a company based on government or industry regulation. Regulatory factors could be positive and negative. We don’t see Carsales subject to any regulation.
Carsales Shares Future Industry Outlook and Disruption
Carsales business has been said to disrupt modern vehicle sales and dealerships. In their financial reports, we don’t see evidence and see the two industries as complementary. Carsales is a platform that relies on dealerships for listing cars, with a large amount of revenue being driven by dealers. Meanwhile, dealers benefit from an additional platform to push vehicle sales.
The biggest risk to the industry is increased competition. Carsales does have an economic moat of being an initial mover with large volumes and listings. For those selling a car, they would benefit from Carsale’s larger buyer traffic compared to any potential components. Likewise, buyers benefit from the large number of cars listed on the website.
Should I Buy Carsales Shares: Prophet’s Take
Carsales is set to benefit massively from the acquisition of Trader Interactive. The purchase of this profitable business at a low multiple will benefit shareholders and improve earnings, boost revenues and allow synergy between the businesses.
We have also seen decent revenue growth from Carsales international subsidies. Although growth has been unimpressive compared to their inflated PE ratio of 48.38x.
With such an inflated PE and relatively low growth, we see CAR as overvalued. The massive increasing debt levels are also a concern for us. And in our opinion, their decision to pay a massive dividend despite their current debt, and capital raising was a poor financial move.
For these reasons, we will not be adding Carsales to our portfolio at their current valuation. We are in range/bearish on the future of CAR shares.
Please Remember all Articles Published on Prophet Invest are Opinion Only
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