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Auto Trader offers free listings as lockdown closes showrooms

The platform offered similar terms to dealers earlier this year
November 5, 2020
  • Consumer demand on Auto Trader’s platform has been at least 20 per cent above normal levels since June
  • The company elected not to pay an interim dividend following the announcement of a second English lockdown
IC TIP: Buy at 586p

Auto Trader (AUTO) has extended free listings on its platform to car dealers for December and relaxed payment terms this month in a bid to support the industry. New lockdown measures came into force today that will close their showrooms until at least 2 December in England, limiting dealership services to click and collect and aftersales. 

The clampdown coincided with a new warning from the Society of Motor Manufacturers and Traders, which predicted £22.5bn in lost turnover this year for the UK car market. The UK registered 140,945 new cars last month, marking its worst October in nine years. 

Not everyone shared the trade body’s downbeat assessment of the market. “Under the circumstances, a 1.6 per cent decline in registrations could be considered a good result,” remarked Alex Buttle, director of used car marketplace Motorway.co.uk. “The general mood amongst dealers and buyers feels quite bullish,” he added.

Car finance activity remains strong, according to the Finance & Leasing Association, which yesterday said that new car finance volumes had risen by 7 per cent in September compared with 2019. Inchcape (INCH), meanwhile, which primarily distributes cars alongside a small retail operation, reported third-quarter revenues of £1.9bn, which sat ahead of forecasts. This nevertheless represented a decline of almost a fifth against the same period last year.

Retailers observed the effects of pent-up demand earlier this year and Auto Trader, which lists new and used cars on its platform, said that demand had been at least 20 per cent higher than normal since June, when dealers in England were allowed to reopen following the conclusion of the nation’s first lockdown. Auto Trader offered dealers free advertising in April and May along with a 25 per cent discount in June, which culminated in operating losses of between £5m and £7m for each month that listings were free.

Auto Trader brought its operating costs down by 11 per cent, helping to limit the blow sustained to margins over the period, which dropped to 58 per cent, from 70 per cent. Operating cash flow also halved to £66m. Yet second quarter operating profits of £67m were level with those of last year, accounting for virtually all of first-half operating profits. 

Auto Trader also raised a net £183m via a share placing in April, while a return to dividends and the share buyback programme - which was cancelled in March - remain off the table. It did, however, have the capacity for an acquisition in July, purchasing vehicle financing platform AutoConvert for £18.2m. Of this outlay, £8.1m will be deferred until 31 July 2022.

Peel Hunt analysts slashed their forecasts for adjusted pre-tax profits and earnings per share in 2021, from £169m and 14.2p respectively, to £157m and 13.5p.

It is a show of confidence that Auto Trader is able to accommodate free listings for essentially a quarter of the financial year. However, this act of generosity mainly illustrates the importance of the network effect - a key economic moat - to Auto Trader. The number of site customers fuels the appeal of listing on the platform and drives up listings accordingly, creating a virtuous circle that has historically provided for high cash generation and shareholder reward. It is arguably worth taking less revenue now for the sake of protecting its long-term proposition. Buy.

Last IC View: Buy, 525p, 9 Jul 2020

AUTO TRADER (AUTO)   
ORD PRICE:586pMARKET VALUE:£ 5.66bn
TOUCH:586-587p12-MONTH HIGH:614pLOW: 309p
DIVIDEND YIELD:NilPE RATIO:35
NET ASSET VALUE:39p*NET DEBT:17%
Half-year to 30 SepTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201918712811.12.4
202011866.25.58nil
% change-37-48-50-
Ex-div:na   
Payment:na   
*Includes intangible assets of £360m, or 37p a share