6:30 am, October 8, 2022
Car dealers think Auto Trader is a ‘valuable partner’ albeit ‘expensive’, according to independent research conducted by analysts Zeus Capital.
Mike Allen, from the broker, has conducted anonymous independent research into car dealers’ thoughts on the used car classified platform.
In a detailed briefing note to investors, Allen reveals those comments after quizzing public and private firms.
Describing the company as a ‘good quality asset’, Allen believes Auto Trader has an 18 per cent upside on today’s share price and targets 632p a share.
At the close of play on Friday, Auto Trader was trading at 526p.
Car dealers told the broker that the high prices Auto Trader charge was the biggest negative.
One said: ‘For a dealer of our scale the cost of AT is £0.7m which has a material impact on PBT in any year so we remain ever vigilant to ways of mitigating costs of which reducing AT costs is always tempting.
‘However, as we look to become a data driven, omni channel retailer we need to remain close to AT given their dominance in this area.’
Others described Auto Trader as a drug it can’t get off, echoing comments made in our Car Dealer Investigation video into the firm that you can watch at the top of this post.
‘Their business model continues to cause me some concerns,’ another car dealer told the broker.
‘Simply put, I’m not sure how we will get off the AT drug.
‘I fear that they will continue to exploit their dominance in the marketplace to their commercial advantage at the long term expense of the retailer.
‘The tail is dangerously close to wagging the dog.’
Other car dealers that responded to the survey were positive about the brand with one saying the firm had switched its tactics and liked the way it provided ‘rich data’.
Another anonymous car dealer added: ‘We work very closely with AT to ensure we maximise our investment. They are therefore an invaluable partner that absolutely enhances our used car business.’
Growth
At a recent investor day, Auto Trader told partners it has a strategy for growth.
It wants to increase the number of dealers that use its products and is focussed on improving its ability to facilitate online car sales through new technology on its platform.
Its recent acquisition of Autorama, the leasing broker, could also see the firm double its profit per unit sold from £150 to £275.
A ‘Deal Builder’ product now enables consumers on the platform to carry out much of the online car purchase on the Auto Trader website.
Used car buyers can get a part exchange valuation and apply for finance on the Auto Trader website, getting support from the car dealer when they need it.
Allen wrote: ‘Over 80 per cent of the revenue from Deal Builder is expected to be transactional, with pricing likely to be linked to the price of the vehicle.
‘It will be a premium product, but Auto Trader expects it to pay for itself through reduced operating costs for the retailer.
‘The benefits being better conversion, quicker days to sell, and saving cost in time/people.
‘Linking back to our retailer feedback, we expect this to be a useful product for smaller, independent dealer groups that have insufficient scale to develop online transactional capability themselves.
‘Auto Trader describes the potential for this product as transformational.’
Zeus Capital forecasts revenue for Auto Trader to grown 11.6 per cent next year, driven by products such as this.
The Autorama deal is expected to generate a £5-7m loss, though, which Allen believes will impact margins for the core business.
The broker said Auto Trader is currently trading on a P/E of 19.8x its 2023 numbers.
‘This is a discount to our selected group of marketplaces and platform peers, despite good forecast sales and significantly higher average EBIT margins,’ said Zeus Capital’s note.
Auto Trader posted its best ever financial results for 2021 with profit of £301m up 91 per cent on the year before.
The group made a 70 per cent margin on revenue of £432.7m.
Zeus predicts it will grow revenue to £482m in the 2023 financial year with profit of £316m.
