CAR GROUP FH24 – Acquisitions so far so good

As part of my top 10 holdings reviews, I comment on the CAR result.

There have been significant changes for CAR over the last couple of years. Total assets have increased from $1.9b to $4.7B, with a like increase in equity. The main contributors have been the dual acquisition of Trader Interactive in the US and Webmotors in Brazil. Cleverly, CAR did these acquisitions after having an existing equity exposure so that some higher level of due diligence was available.

After a few years of solid but lowish growth, the last three years have seen an acceleration.

The interesting question is what is driving this growth and is it sustainable?

The core Australian business of a car-selling website has shown solid double-digit revenue growth and improving margins over this whole period (ex C19), however, the group growth was not reflective of this performance.

Several missteps in tyre reselling and finance detracted from returns and well as seeing off some competition. There was also significant investment into new products. The charitable conclusion is that now those investments are paying off. The acceleration also coincides with the offshore acquisitions. The size of these acquisitions makes it imperative that they work, and importantly the early signs are good.

The new products include dynamic pricing in the private space, Instant offer, improving digital retailing to increase listings, completions, and ease of transactions, moves to improve depth, and finance options, in Korea Home delivery and guarantee products, and an overall strengthening and expansion of the media strategy to get more ads on the site. There has been a lot going on, and the broad strategy is to replicate the Australian success with these products in the foreign markets, which appear to be gaining traction.

FH24 saw perhaps CAR’s strongest result in quite a while, with double-digit growth on all geographies on a CC pro forma basis. Korea seemed to be the only one struggling a bit as an investment phase has been undertaken to embed leadership in the market.

CAR states that the TAM in each market is huge and they play a small part, with only Australia being anywhere near mature. A figure of 7% saturation by CAR in its markets across the world was given. Not too sure of the real relevance here, but management believes they have a lot of potential growth.

CAR geographic mix has now changed markedly with Australia 42% of revenues, NA 25%, LATAM 16%, Asia 11%. Australia was 72% in 2019.

Car dominates various markets, compared to the nearest competitor, 7.6X Australia, NA 3X, Korea 6X and Brazil 2X. There is an understanding that dominance is necessary in their markets and further investment to entrench the company is undertaken to further embed the business to create a virtuous cycle of cashflows and reinvestment and furthering the lead, well understood by most players in these markets from what I can see. (same as REA)

CAR has a history of strong cash conversion and cash generation (outside of C19). The acquisitions were made with equity calls that negatively impacted ROE but left the ND/EBITDA around 1.8X and likely to reduce, so it is comfortable. There was a slight EBITDA margin dilution as well as the international margins are lower, but not significantly.

The outlook given was that the car market is good. Supply post-C19 has normalised, the consumer is confident, and good growth in revenues and EBITDA are expected for the rest of FY24.

Not the tax rate is low (20%) as the TI acquisition gave rise to acquisition tax losses, amortisation is large. Not too sure of the trajectory I have assumed a gentle normalisation.

The ability to deliver strong double-digit growth will be tested over time, imo. Cars, trucks etc are not houses or apartments. The well of opportunities is not that deep. There is good business momentum and a firm strategy to execute the apparent growth in international operations, but it is likely to saturate after a few years. Therefore, I am unwilling to pay a full PE at the end of this growth period at this stage. The shares at $33.50 are fair but full. Little room for mishaps. At this time CAR is a good value of around $24, IMO.

Disc help top 10 holding, last buy levels $19.95, last sell $29.95, average profit/loss adjusted cost base, $8.74.