Auto Trader shares have rocketed from 557p to 616p this week, including a 38p burst yesterday on the back of better-than-expected results and outlook. The management had the culture and confidence to ride out harsh lockdowns, an excellent test of its ability to capitalise in better times.
Advertising revenue from car showrooms, the biggest earner, fell 31 per cent after conceding free advertising in April, May, December and February, and a discounted rate in June last year.
Nathan Coe, its chief executive, said: “We decided early on to proactively support our people, car buyers and our customers, many of whom run small, family-owned businesses. These actions have positioned us for a strong start to the new financial year.”
It says much about the business that a tough year cut the operating profit margin from 70 per cent to 61 per cent, a figure most companies would die for. But the big story is the progress reported in some new initiatives, with the launch of guaranteed part-exchange, the trial of vehicle reservations and the takeover of the financing platform AutoConvert.
Coe said: “The shift online in automotive retailing has accelerated, and with these core components we are well placed to benefit both buyers and sellers. This online development is being built on our marketplace, which has strengthened over the year. Car buyers are using Auto Trader at record levels and our retailer forecourt numbers are significantly higher than they were 12 months ago, reinforcing our competitive position.”
The business began in 1977 as a classified advertising newspaper for Thames Valley car buyers. While classified ads shrivelled in local newspapers, Auto Trader shifted online as the internet spread in the mid-1990s, ditching the print version entirely by 2013.
Apax Partners, the private equity firm, took full control of Auto Trader when it bought it from Guardian Media Group and floated it on the stock market six years ago. In April last year, it raised £183 million from a share placing to bolster its finances against the storms ahead.
It is an anachronism, a media stock tied to one particular industry — cars. That has the downside that energy efficiency is leaning away from private and towards public transport.
But it will be a long time before the public surrenders their sense of independence from having their own cars. Vehicles will benefit from electric and future fuel revolutions, and the greater efficiencies of self-drive. New products will drive sales and advertising for the foreseeable future.
All in all, it is a promising backdrop for Auto Trader, which has built deep moats around itself to protect what analysts regard as a quasi-monopoly. Investors must satisfy themselves that the business is managed well enough to extract maximum advantage from that position.
As a sign of confidence, the board has announced a 5p final dividend, doubling last year’s payment after the final was scrapped. The policy will be to pay about a third of net income to shareholders in dividends, and return remaining surplus cash through share buy backs, which will recommence shortly.
At 616p the shares are on a heady 47 price to earnings ratio because of the reduced latest earnings. A more realistic measure is the 22 multiple of pre-Covid earnings. That must be the target for the current year.
Richard Hunter, Interactive Investor’s head of markets, said: “With the pandemic pain in the rear view mirror, Auto Trader is well placed to benefit from a return to normality.”
ADVICE Buy
WHY The rating is demanding, but the management looks capable of justifying it
Go-Ahead Group
Go-Ahead shares had recovered strongly from a low of 570p last October as the post-pandemic picture became clearer for transport, reaching £14.35 in April. However, March’s Bus Back Better plan and last month’s Williams-Shapps white paper on Great British Railways knocked the stuffing out of the price, and yesterday’s trading update did nothing to reverse the downward trend.
However, this could be the time to follow Warren Buffett’s advice “to be greedy when others are fearful”.
The group runs almost 6,000 buses and carries more than two million passengers a day, including one in four London bus passengers, as well as services in Singapore and Ireland. Its rail operation comprises Southeastern and GTR (Govia Thameslink Railway), which operate through the 65 per cent-owned Govia. It also runs trains in Germany and Norway.
As it is the UK’s largest train set, handling nearly a third of all passenger rail journeys, it is firmly in the headlights of the consumerist white paper, which plans to exert tighter control on operators.
David Brown, chief executive, who is retiring at the end of this year, welcomed Bus Back Better and the Williams-Shapps review, which at least put public transport up the agenda. In advance of the financial year-end on July 3, he announced “robust” trading across all divisions and the highest passenger volumes since the start of pandemic, 65 to 70 per cent of pre-crisis levels in regional buses. The results for the London and International bus division should be buoyant too.
The update is light on numbers, and some improvements are one-offs. On the chances of a restored dividend, Brown will only say that he continues to “work towards” a payment “at an appropriate level in the 2021 calendar year”. That might suggest a final dividend on the full-year results in the autumn.
Jefferies Financial Group says the brighter outlook still shows the strength of its portfolio and expects the consensus estimate for the financial year’s earnings before interest and tax to rise 10 to 15 per cent. Longer-term, investors will want to see who succeeds Brown and what fresh initiatives they introduce.
ADVICE Buy
WHY The share price fall has been overdone
