Carsales Shows Who's Boss
Market welcomes more aggressive pricing
Online vehicle market place Carsales ((CAR)) on 17 July 2017 raised its rates on standard ads for cars advertised by private sellers in a move expected to help lift its bottom line.
Reflecting this optimism, Carsales’ shares have traded higher in July to a high of $12.72 post the announcement from a recent low of $10.84 in May.
Under the new pricing model, ads for cars below $5000 remain free. Premium ads for cars of all values are also unchanged at $135, and Concierge ads are $300. But the previous $68 flat rate for standard ads has been split into four tiers, under which the ad price differs according to the value of the car.
For cars in the range $5000-$15,000, ads now cost $68 (unchanged). For the range $15,000-$20,000, ads are $75 (up +10%). For the range $20,000-$30,000, ads are $85 (up +25%). For cars priced above $30,000, ads are $95 (up +40%).
UBS reacted most cautiously to the announcement, estimating that private revenues will increase by about +9.5% in 2017-18. The stockbroker set its target price at $10.50 and its recommendation at Neutral.
Private sales (excluding Tyresales) comprise only about 10-15% of 2017-18 group revenues, according to UBS’s update, and standard ads for cars represent a sub-set of private sales, comprising about 8-10% of group revenues.
UBS calculated the resulting increase in Net Profit After Tax would be about +1%. Carsales “is still inexpensive vs. online peers, but with a lower growth profile,” the report states.
Credit Suisse calculated the weighted average ad price would increase by about +15%, which it forecast would add around $6m to revenue in a full year. CS also raised its target price to $12.60 from $12.00 to reflect higher forecast earnings. But it lowered its rating to Neutral from Outperform, saying the stock had already been substantially re-rated and is now trading broadly in line with the revised target price.
Stockbroker Morgans estimates the price increases would raise the average yield for private-sale ads from $68.00 to $77.75, an increase of +14.3%. It raised its price target to $12.88 from $11.14, but retained its Hold recommendation on the basis that the revised target implies a total shareholder return of less than 10%.
Most optimistic was Citi, which suggests: “The changes are likely to boost take-up of Premium ads in higher segments as the cost differential shrinks.”
Even so, Citi estimates an increase in the weighted average for standard ads of just under 12%, and: “With no change to Premium ad pricing, this is likely to be closer to 10% across all ad types.”
Citi set its target price at $13.75 and maintains a Buy recommendation.
Analysts look for more bold moves
Citi points out Carsales leads the Australian online car market. Its nearest competitor, Gumtree, dominates the market for very low-priced cars, but Carsales is the dominant site for vehicles with an asking price over $20,000.
“Across the two sites, CAR’s market share of total cars advertised is 40% for cars under $15,000, 67% for cars between $15,000 and $30,000, and 82% for cars over $30,000,” according to the report.
Citi sees the new pricing model “as a signal that carsales.com.au could be starting to leverage its strong market position to accelerate yield growth”.
The group is the most dominant of the three major Australian online classifieds sites, with a stronger market position than either seek.com in recruitment or realestate.com.au in property, it said.
“Despite this dominance, it has had the softest price growth historically. In our view, carsales.com.au should be able to leverage this position to boost yield growth further, particularly via add-on products, such as inspections, finance, Pay Protect.”
Credit Suisse suggests Carsales has historically been very cautious on raising private listing prices. Although it did raise private-sale ads to $68 from $65 in January 2017, this was the first rise since December 2013.
“We believe that CAR's strong market position and product offering means that it is well positioned to continue to improve monetisation and for higher yield to be a key driver of revenue growth going forward.”
Morgans believes the move reflects a new mood of confidence in the wake of the failure of its major competitor, Carsguide.com, to mount a serious challenge to the leader.
As a result, “the competitive landscape faced by Carsales.com appears far less threatening than we had anticipated” and “Carsales will not need to step up marketing spend as much as we had previously feared.”
You can’t see round corners
The brokers agree near-term prospects for Carsales.com depend largely on demand for used cars and the overall economic environment in Australia.
Morgans also identified unfavourable competitive behaviour or regulatory developments in key foreign markets such as Korea and Brazil, while Citi points to the general cyber threat to companies in online markets.
FNArena's database is currently evenly split between four buys and equivalent ratings and four neutral ratings. The consensus target is $12.71, suggesting 2.0% upside to the last share price. Targets range from $10.50 (UBS) to $13.75 (Citi), but not all brokers have updated post the price increases as yet.
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