Auto Trader Group plc (AUTO) Ordinary Shares 1p

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Auto Trader's revenue rose 16% to £249.8m. Excluding the Autorama acquisition, revenue was up 11%. Customer numbers and product uptake have been better than expected. Average Revenue Per Retailer (ARPR) per month rose £205 to £2,404. That reflects increased prices, and the adoption of new products, with the latter contributing £133 to the increase.

The average number of car retail forecourts, which are important customers for Auto Trader, rose 2% to 14,161. Physical car stock on site rose 1% but new car listings fell to 22,000 from 39,000.

Underlying operating profit rose 11% to £168.8m, with revenue growth offsetting higher costs. Auto Trader had an operating margin of 71%, but this was 61% including Autorama.

The group generated free cash flow of £132.1m, and had net debt of £56.3m.

Looking ahead, Auto Trader expects margins to be maintained at 70% in the second half. Retailer forecourt numbers are still expected to dip slightly, but ARPR is predicted to increase.

An interim dividend of 2.8p was announced, and the group continues to prioritise its share buyback programme.

The shares fell 2.9% following the announcement.

Our view

Auto Trader is a remarkable business. It's the UK's largest online car sales platform. Its enormous marketplace is where individuals, or more often, car dealerships, advertise and sell cars. Sounds simple enough.

But sometimes simple is best. Auto Trader's capital light business model (running a website doesn't cost much) supports operating margins in the region of 70%. That is exceptionally high and offers resilience in tough times.

One reason Auto Trader enjoys these spoils is because of its pricing power. Its customers have little choice but to pay an ever-increasing price per-month for Auto Trader's website slots. More and more customers are switching to the group's more lucrative, expensive, advertising packages too.

Some things to keep in mind are the falling number of retailer forecourts. Car dealerships were already dealing with structural headwinds like regulation and technological changes, and more recently the ongoing supply chain problems. This means the number of dealerships is likely to dip in the medium term. Fewer dealerships mean fewer Auto Trader customers.

Offsetting this relies on continuing to increase Average Revenue Per Retailer. This can only be done en masse if dealerships are in a strong position, which won't be the case if sales drop sharply. That's not on the cards immediately, but a sharp economic downturn could hurt in the short-term.

The group's also doubling down on services, boosted by acquisitions last year. The pandemic has accelerated the shift to online, and Auto Trader has an opportunity to grab an even bigger piece of the pie here by offering car finance options on the site. This is also behind the latest acquisition of Autorama, a marketplace for leasing vehicles. As the cost of used cars is still high, being able to offer leasing deals is a shrewd move. We have high expectations though as we view the price paid for the company pretty steep. Auto Trader's healthy balance sheet is what gives it the fire power to invest in new opportunities.

Overall Auto Trader's dominant market share and low cost base means it has the tools to ride out several difficult challenges. In the medium term the group has to navigate forecourt closures. We note many of these strengths are largely taken into account in the group's current valuation.

The Share Research team is ceasing covering of Auto Trader. This is the last update and house view HL will produce on this stock. You can still find out more about our thoughts on the Financials industry by signing up to our Share Insight email.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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