Auto Trader resisting wider economic stress

Understanding the impact of macroeconomic conditions on Auto Trader Group (AUTO) is tricky. The online platform makes money from the volume of cars on the website but also by selling services to the retailers that use their platform. These services include advertising packages and a product to help sell cars outside the local area.

Volumes across the car sector are down this year. Supply shortages pushed new car registrations down 11 per cent and used car transactions fell by 16 per cent against the same six months in 2021. To offset the fall in volumes on the website, Auto Trader has been selling more “higher yielding” packages to its customers. This helped push up its average revenue per customer by 9 per cent to £2,404. Now, 32 per cent of stock is being sold through packages above standard, up from 25 per cent last year.

The cost of living crisis will likely lower overall demand for vehicles. However, the upshot is that retailers might pay more money for better access to the customers that are in the market. So far, this is how it is playing out and the 60 per cent operating margin indicates the platform has strong pricing power as the leading used car website in the UK.

However, the operating margin slipped from 70 per cent last year because of the acquisition of Autorama. The company bought the car leasing marketplace in June, and a deferred consideration charge of £13.8mn was put through in the half. Strip this out and operating profit was actually up 7 per cent rather than down 2 per cent. Management is expecting margins to return to 70 per cent.

Broker Peel Hunt expects adjusted earnings per share to rise to 27.3p for the full year, giving a 2023 price/earnings ratio of 20. Strong margins and market dominance justifies the price. Hold.

Last IC View: Hold, 579p, 26 May 2022