Proactive Investors - Run By Investors For Investors

Auto Trader downgraded by UBS due to 'limited potential upside” and risk of a no-deal Brexit

UBS cut its rating on the shares to ‘sell’ from ‘neutral’ but raised its target price to 540p from 530p.
auto trader
Around noon, Auto Trader shares fell 2.5%

Auto Trader Group PLC (LON:AUTO) shares moved in reverse after UBS downgraded its recommendation on the stock, citing “limited potential upside” and continued risk of a no-deal Brexit.

The car ads site last week reported a 15% increase in pre-tax profit to £242.2mln on revenue up 8% to £355.1mln for the year to March 31.

READ: Auto Trader profits rise but shares drop as it warns of weaker revenue from manufacturers

The group had said the new financial year had started well and it was confident of meeting its growth expectations for the year.

However, the company warned that it expects revenue from its manufacturing clients to decline in the first half due to challenges facing the industry.

“Auto Trader is trading strongly as evidenced by last week’s results (average revenue per retailer up 9%), and guidance for ‘another year of strong ARPR growth’,” UBS said.

“However, the results showed Auto Trader’s model is not without risk.”

UBS cut its rating on the shares to ‘sell’ from ‘neutral’ but raised its target price to 540p from 530p.

UBS lowers earnings estimates 

Weak guidance on manufacturing revenues led UBS to lower its 2020-21 estimates for earnings per share by 2-3%.

However, the bank said it expects core marketing business revenue to achieve a compound annual growth rate (CAGR) of 6% for 2019 to 2026 and continues to see £125mln incremental revenue from longer term.

To deliver an acceleration on the total revenue growth it has delivered, UBS believes Auto Trader will need to capture about £130 of classified revenue for every used car sold, compared to £90 in 2019.

The company will also need to capture almost all (75%) of the £250mln of new revenue opportunities, UBS said.

'Risk/reward is skewed negatively', UBS says

“While this may be feasible, we think the risk/reward is skewed negatively with limited potential upside, and continued risk of a no-deal Brexit,” the investment bank said.

On the possibility of the UK leaving the European Union without a deal, UBS said: "With a no-deal Brexit a potential risk, we could see another drop in transactions like we did in 2018 (-11%).

"This led to a 6% drop in the number of cars listed on Auto Trader by April 2018. In our view, another drop in stock on site could put consensus ARPR growth at risk, especially in FY21."

UBS also questioned whether Auto Trader investments were sufficient to deliver the next generation of products at the speed the market requires.

The broker said Auto Trader is trading at 26 times 2020 earnings per share estimates, which implies the market is pricing in 10% CAGR in revenue for 2019 to 2026.

Around noon, shares fell 2.5% to 590p. 

View full AUTO profile View Profile

Auto Trader Group PLC Timeline

Related Articles

drainpipes
May 23 2019
Company is looking for more acquisitions after integration of Metro Rod
medical imaging graphic
June 13 2019
Here we take a closer look at the imaging and diagnostics firm IQ-AI
H&T
May 21 2019
H&T investing in digital offeringProfits gain in 2018Outlook upbeat as strategy pays off

© Proactive Investors 2019

Proactive Investors Limited, trading as “Proactiveinvestors United Kingdom”, is Authorised and regulated by the Financial Conduct Authority.
Registered in England with Company Registration number 05639690. Group VAT registration number 872070825 FCA Registration number 559082. You can contact us here.

Market Indices, Commodities and Regulatory News Headlines copyright © Morningstar. Data delayed 15 minutes unless otherwise indicated. Terms of use