9:47 am, March 31, 2023
Auto Trader shares are ‘undervalued’ because the advertising marketplace has opportunities to ‘grow revenue at higher margins’.
That’s the opinion of stock broker Zeus Capital in a briefing note issued to investors today.
In the bulletin, analyst Mike Allen forecasts that Auto Trader will increase the average revenue per car dealer by £210 in its 2023 financial year, which comes to an end today.
Allen wrote: ‘We continue to believe Auto Trader shares are undervalued because of the high quality of the core business and the long-run opportunities to grow revenue at higher margins.
‘Our average valuation estimate is 631p per share. Faster progress expanding the group’s product suite, including its Deal Builder tools, and on improving Autorama contribution could boost this valuation.
‘We expect an update on these initiatives at the FY23 results on 1 June, where we will also update our valuation estimate.’
Shares in Auto Trader – led by CEO Nathan Coe, pictured – were trading at 606.8p this morning.
Zeus says it is ‘comfortable with all major trading assumptions’ it has made in its previous Auto Trader forecasts.
It expects Auto Trader to make an EBIT profit of £271.8m in this financial year, lower than that forecast by Bloomberg which thinks it could be more like £290.7m.
The investment bank adds that while used car pricing remains strong overall, EV values have tumbled nearly 30 per cent in the last seven months. Strong used car pricing is good for Auto Trader’s dealers and subsequently a positive for Auto Trader too.
However, Zeus Capital does highlight the fact used car supply will continue to be a challenge as with less cars to sell, dealers have less need to advertise.
Zeus Capital expects Autorama – the leasing firm it bought in a £150m deal – will have an ‘£11m negative contribution’. It is expected to break even by 2025.
And the disposal of Webzone, its Irish subsidiary which trades under the Carzone brand, will see the number of car dealers on Auto Trader Group’s books fall 0.7 per cent.
Auto Trader also faces a rise in corporation tax from 19 per cent to 25 per cent which will reduce earnings per share by around eight per cent, says the broker.
Auto Trader’s half year results revealed in November showed it made a £149.1m profit in the first six months of this financial year.
Full year results are expected in June.
