- Carsales remains on track to deliver steady earnings growth in FY19, with the company's outlook statement predicting another solid year from the core Australian advertising business.
- Display advertising is weak but, in terms of earnings momentum at the group level, positives continue to outweigh the negatives.
- Excluding early stage ventures, offshore operations are predicated to deliver solid to strong earnings growth.
- Overall our earnings forecasts are little changed. Out DCF valuation, which sets our price target, dips slightly (Morgans clients can log in to view).
- We maintain our Add recommendation.
Another solid year in prospect
Carsales.com's outlook statement provided at the annual meeting provided no real surprises and leaves the company on track to deliver modest underlying revenue and earnings growth in FY19. While some areas of the business remain weak, on balance the momentum in stronger divisions will overwhelm the effects of the laggards. Carsales said that the domestic core advertising business (76% of earnings) was off to a solid start in FY19, but that display advertising had been disappointing. The outlook is consistent with our weekly count of car ad volumes and Hitwise monthly traffic volumes.
Changes to forecasts, valuation
Changes to our forecasts are largely immaterial as the new outlook statement is in keeping with our former forecasts. We have revised our forecasting model to align with the divisional revenue and EBITDA splits employed by Carsales.
Our price target is set by our discounted cash flow valuation. Due to the slight changes to our forecasts our DCF valuation has decreased slightly (Morgans clients can log in to view).
Risks and catalysts
Risks to our revised valuation and price target include but are not limited to:
- A major slowdown in the market for new and used vehicles in Australia.
- Stronger competition from major rivals, including Carsguide.
- Failure of offshore investment to meet expectations.
Potential near-term catalysts include:
- Strong growth in new and used car sales.
- Absence of major competitive threats.
- Strong earnings growth from offshore operations.
Carsales offers investors exposure to growth in online automotive advertising in Australia, Asia and Latin America. We believe that market conditions should remain favourable for the next 3-5 years. As the stock trades below valuation, we maintain an Add recommendation.
Morgans clients can login to view our detailed report and share price target for Carsales.com (CAR). Alternatively, please contact your nearest Morgans office for access.
Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.