Analysts at the Swiss bank upgraded the stock to ‘neutral’ from ‘sell’, saying they see long-term opportunities for what is the market-leading car ads site, while staying mindful of a recent drop in the number of trade used cars listed on the site.
In November, Auto Trader revealed pre-tax profits had increased 12% to £127.7mln in the half-year and said that it expected revenue per retailer growth to continue, albeit with a slightly increased headwind from higher stock.
The analysts see two principal drivers of growth from the eight years from 2020, where Auto Trader “can add £330mln of revenue”, which would represent a 9% compound annual growth rate versus 8% in previous forecasts.
“First, we think Auto Trader can use a combination of price rises (3% p.a.) and new product launches to add an incremental £190mln of retailer revenue over the period.”
“Second, we see Auto Trader adding a further £125mln as it transitions to a transaction platform,” of which the largest component is playing “an increasing role in dealer finance and part exchange enabling consumers to make deposits online”.
Fewer than 50% of retailers on Auto Trader currently use its finance option, which allows them to sell cars on monthly payment plans, in exchange for the company getting a larger portion of brokerage fees, at roughly £400 per car.
However, UBS cautioned that it continues to believe there are risks to consensus forecasts for growth in average revenue per retailer (ARPR) due to the drop in the number of trade used cars listed on site and expects stock to rise as Auto Trader launches an independent dealer promotion which will allow dealers to put additional cars on Auto Trader at no extra cost until January.
Estimating that if trade used car volumes remain down 7% yoy, this implies second-half revenue will face a circa 4% headwind, so have forecast stock ARPR to be down 2% at the full year.
Nevertheless, the bank hiked its target price to 560p, from 510p and the shares ticked up slightly to 570p on Tuesday before flattening off.