In recent weeks we flagged that we were actively looking for opportunities to increase our exposure to high-quality global cyclicals to position the portfolio ahead of US interest rate cuts.
Importantly, we are focused on businesses that, while cyclical, also have 'bottom-up' structural growth levers that are independent of macro conditions, allowing for strong earnings growth ‘through the cycle’.
Our watch list of potential buying opportunities this reporting season included Australia’s second largest online classifieds business, Car Group (CAR), which has now released its full year result.
CAR Group – Positive result provides confidence in the medium-term outlook
In FY24, CAR reported impressive NPAT and proforma EBITDA growth of +24% and 17% respectively. This was broadly in line with consensus expectations.
Pleasingly, management’s outlook pointed to robust trading conditions across key segments supporting ‘good’ group EBITDA growth in FY25, which will be driven by volume growth, increased depth penetration, and price rises.
Overall, the positive update has strengthened our conviction in CAR's medium-term outlook, which has provided rationale to add CAR to the Focus Portfolio at a 3% weight.
To fund this, we have reduced our position in BHP by -3% to rebalance the portfolio and realign our positioning to better reflect our cautious stance towards iron ore.
All Engines Firing - Adding CAR Group
CAR Group has been added to the Focus Portfolio at a 3% weight
CAR Group (CAR) is an automotive classified advertising business that allows private and dealer customers to advertise vehicles for sale online. Dealer revenues are based on a pay-per-lead and subscription model, while private revenues are listing-based and use a dynamic pricing model based on the value of the vehicle. The company’s key brands are Carsales in Australia, Trader Interactive in the US, Encar in South Korea and Webmotors in Brazil.
Our investment thesis for CAR can be summarised in three key points (explored below).
1. Dominant market leader with durable competitive advantages
CAR is the clear market leader in each of its key segments globally.
CAR’s superior number of listings and site visitors generates network effects for the business, which has proven to be a strong competitive advantage that has allowed it to defend its #1 position in Australia for two decades.
As vehicle listings naturally gravitate to the player with the most potential buyers and vice versa, CAR offers the strongest value proposition to both buyers and sellers, which in turn creates barriers to entry and underpins a high degree of pricing power.
2. Carsales Australia provides a strong foundation for the group
While Carsales (Australia) is comfortably CAR’s most mature segment, it is still poised to deliver high-single digit earnings growth over the medium-term, which will be underpinned by pricing / yield growth (as well as listings / leads to a lesser extent)
In FY25, yield growth will be driven by several initiatives, including:
- Higher depth penetration – higher priced depth products deliver added value for sellers, by providing features such as superior inventory rankings and premium listings.
- Dynamic pricing optimisation – allows CAR to better align vehicle price with value in a structured and automated way. Dynamic pricing supports higher yields, as it allows for a faster sales process at the best price.
- Instant Offer – allows customers to get a rapid valuation of their car which can be accepted and sold to a dealer at higher average pricing than traditional trade-in values. This has the benefit of providing higher yields and moving inventory faster.
Given CAR's take-rate (average ad fee as a % of average car price) is just 0.5%, there is ample scope for Australian yields to move higher over time (particularly given the dealer ROI is high).
3. Long runway for growth in underpenetrated international markets
The majority of CAR’s earnings growth over the next 5-10 years will be driven by its less-mature, higher growth international businesses, which in FY24 first accounted for ~50% of group EBITDA collectively.
Unlike its ASX classifieds peers, CAR has demonstrated its ability to succeed offshore, which is supported by its scalable global technology platform and IP that can be rapidly deployed into new markets, given the dynamics of vehicle classifieds markets are broadly similar from country to country.
This stands in contrast to other online classifieds markets (e.g. real estate), where market dynamics vary significantly between different countries, making offshore growth harder to achieve. For example, REA’s significant investment into its loss-making India segment has yet to translate into meaningful growth.
Given CAR’s penetration (and overall digital ad penetration) is still relatively low in each of its international segments, the runway for international growth remains substantial.
Upside Risks from US Interest Rate Cuts
While CAR’s North American segment, Trader Interactive, continues to deliver impressive structural growth (driven by customer wins, greater depth penetration, and dynamic pricing), the business faces a challenging macro environment in the US, which has been reflected in softening dealer additions and inventory levels.
However, US interest rate cuts should stimulate an improvement in RV and leisure vehicle activity and result in better dealer additions for Trader Interactive over the medium-term.
Given CAR’s cautious FY25 guidance for Trader Interactive and considering consensus expectations of subdued US dealer activity over the next twelve months, there is scope for an upside surprise in FY25 should we see US rate cuts over the near-term.
Valuation Offers ‘Growth at a Reasonable Price’
CAR is trading on a 12-month forward EV/EBITDA of 21x, which is broadly in line with its historical average as well as attractive given robust trading conditions, the prospect of an improved US macro backdrop (with looming Fed rate cuts), and upside risks to FY25 consensus estimates.
Compared to other ASX-listed online classifieds, CAR offers the best value on a growth-adjusted basis, trading on a PEG ratio of 2.5x versus the peer average of 2.8x.
| Company Name | Ticker | Valuation Multiples |
3 year earnings CAGR (FY24-FY27) |
PEG ratio* |
||
12mth fwd EV/EBITDA |
12mth fwd PE |
EPS |
EBITDA |
|||
| REA Group | REA | 28 |
47 |
16% |
10% |
3.0 |
| Seek | SEK | 17 |
34 |
13% |
13% |
2.7 |
| Domain | DHG | 14 |
31 |
11% |
9% |
2.9 |
| CAR Group | CAR | 21 |
34 |
14% |
12% |
2.5 |
| Peer average | 19 |
37 |
13% |
10% |
2.8 |
|
*PEG refers to 12 month forward PE divided by 3 year EPS CAGR. Source: Refinitiv, Wilsons Advisory.
Trimming BHP
BHP has been trimmed by -3% to a 7% weighting in the Focus Portfolio
While we have long maintained a cautious stance towards the structural outlook of iron ore, near-term fundamentals have softened amidst weaker demand in China, while supply additions have been robust and inventory levels are rising. The weaker supply/demand backdrop, combined with the fading prospect of further meaningful stimulus in China, has weighed on spot prices and creates downside risks for the iron ore price over FY25.
Read Iron Ore – Digging into Our View
Moreover, reducing BHP is necessary to ‘rebalance’ the Focus Portfolio to our targeted underweight exposure to iron ore (vs the ASX 300 market weighting, which has shifted lower due to weakness in the iron ore miners). In summary, while BHP remains our preferred iron ore exposure given its low-cost assets and growing copper exposure, the risk/reward has become less compelling over the near-term, which warrants a reduced portfolio position.
Written by
David Cassidy, Head of Investment Strategy
David is one of Australia’s leading investment strategists.
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