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Berenberg upgrades Auto Trader as risks better understood

Risks appear better understood and expectations for Auto Trader are more reasonable, Berenberg said on Friday as it upped the stock to 'hold' from 'sell' and lifted the price target to 365p from 350p.
The bank said it has been cautious on the company's medium-term growth and profitability levels for some time. While many of its concerns remain, mostly with regards to the outlook for the used car market and the impact from competition, both consensus expectations and valuation multiples have reduced over recent months.

"Negative near-term stock trends are now the base case (versus growth before); and guidance for weaker consumer services revenues has given investors an insight into how competition can affect Auto Trader.

"Where we have been positively surprised, however, is in Auto Trader's ability to drive new product penetration (such as dealer finance), which could help to offset any near-term headwinds."

Berenberg said Auto Trader's full-year 2018 results highlighted two positives that could support growth in the near term: 1) that the April price increases "went well" and 2) that over 69% of retailers eligible for monetised dealer finance are now paying around £100 a month to advertise their own finance rates.

"Auto Trader is now trading on an EV/EBIT of 16.1x and a price-to-earnings of 19.5x, a material discount to both Rightmove and Just Eat. We believe this valuation now fairly reflects both the double-digit earnings growth but also the associated risks highlighted in our previous research."

At 1030 BST, the shares were up 2% to 392.80p.

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