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Auto Trader revs up dividend, shares fall on softer advertising warning

Auto Trader Group more than tripled its dividend as revenue and earnings beat expectations for its full-year performance, with the new year forecast to see greater used car sales volumes and improving margins but a slowing in display advertising growth.
However, shares in the online used-car marketplace skidded lower on a bigger than expected slide in the number of used car dealers advertising on its website and apps.

For the current year, the FTSE 250 group warned that it expected consumer services revenue to remain at low single digit, while it saw display advertising growth slowing "slightly" from recent levels but to remain at double-digit levels.

In the year to 31 March 2017, revenue revved up 9% to £311.4m, beating the consensus analyst forecast of £310m as the audience grew with an increase from just under 48m visits the year before to 55.4m, which is four times larger than its nearest competitor.

While the number of retailer forecourts advertising on the Auto Trader marketplace was down 2% at 13,296 this was mainly smaller and non-car related markets, the average revenue per retailer per month climbed £162 to £1,546.

The FTSE 250 group widened its underlying operating profit margin six percentage points to 67% as staff costs and overheads fell, leading to a 19% rise in underlying operating profits to £207.2m - though this was short of the consensus £212m.

With pre-tax profits up 23% to £193.4m, basic earnings per share increased 22% 15.64p (15.2p) and the board proposed a final dividend of 3.5p per share to take the total to 5.2p per share for the year, around three and a half the 1.5p payout from the year before, though that was its first full year as a listed company.

Chief executive Trevor Mather said the strong growth came as consumers are spending "more than double the time researching their next car online than they do offline", to which the company has responded by looking to "create greater transparency and therefore trust in our marketplace", which he said increases the value of the Auto Trader product.

Looking to the current year, after a number of years of near uninterrupted growth, and despite the spike in the first quarter of the calendar year, the industry now expects new car registrations to plateau or decline in 2017, "but continues to anticipate growth in used car transaction volumes".

He added: "The new financial year has started well, and despite the wider political and economic uncertainty, the board is confident of delivering its growth expectations for the coming year. We remain focused on enhancing the value of our marketplace and continuously improving the products and services we offer for consumers, retailers and manufacturers."

In the 2018 financial year ARPR improvement is expected to return to 2016 growth levels at or above £130 per month.

While costs are expected to increase at the rate of mid single digit, marketing spend as a percentage of revenue is expected to remain broadly constant, with slightly higher overheads being offset by further, albeit smaller, savings in depreciation and amortisation. Operating margins are set to rise further.

REACTION AND ANALYSIS

Auto Trader shares fell almost 6% to 407.1p, but this merely knocked off the froth that had appeared since the start of the month.

Analyst George Salmon at Hargreaves Lansdown said the group's main worry is the increasingly difficult conditions facing the industry.

"Clouds of doubt hang over the economy, and after a scramble to register new cars before April's hike in vehicle excise duty, new car sales now look likely to fall this year. This is unlikely to impact used car sales in the short-term, but any decline will likely feed through to the used car market over time."

But he said the status of the website and apps as the UK's favourite by a long distance makes Auto Trader ever-more essential to car dealers. "This gives AutoTrader the power to put through price increases year-on-year, while new, smarter data-driven products are coming through all the time."

Credit Suisse analyst Joseph Barnet-Lamb said the warning on weaker auto retailer advertising numbers for the company was the reason for the share price fall.

Barnet-Lamb said retailer forecourts advertising at 13,296 was short of the 13,391 consensus forecast and a "cause for concern", supportive of his 'underperform' rating on the stock.

He said average revenue per retailer forecourt rises will become harder to pass through as smaller UK used car retailers see profit margins erode or even go out of business.

Numis was impressed, however, with analyst Paul Richards' PBT and EPS estimates slightly beaten by the results.

"As outlined in our preview note, the group has repackaged its selling pillar including the introduction of advanced and premium levels at materially higher ARPR."

With management guiding to a monthly ARPR increase of £130 or more in 2018, Richards believes the new packages provide considerable ARPR opportunity well into the medium term, leading him to raise his PBT/EPS forecasts to £219.5m/18.2p from £218.5m/18.2p for March 2018.

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