It’s been a Rolls-Royce ride for investors who bought into Auto Trader Group at its flotation just over two years ago. Issued at 235p, the shares have raced ahead. Even after a modest sell-off yesterday, they are trading at 418½p, outpacing the FTSE All-Share index by almost 50 per cent.
The online platform that helps to match used-car sellers with buyers has produced another excellent year. Revenues are up by 9 per cent, underlying operating profit is up 19 per cent and cash generated is up by 18 per cent.
Auto Trader is a cash machine. Its monopolistic scale has ensured a wide moat, which its competitors have struggled to invade. As it said at its investor presentation, it receives 55.4 million visits a month to its site, which is four times more than go to Gumtree, six times more than PistonHeads, and 22 times more than use Motors RAC.
Used-car buyers flock to Auto Trader, which means car dealers have no choice but to advertise on its site. The Arthur Daleys may mutter about the average of £1,546 a month they pay to the website in fees, but they feel they have little choice but to do so.
The number of retailer forecourts advertising on the site is down by 2 per cent to 13,296, but this is probably more because of industry consolidation than any serious attempt to escape Auto Trader’s iron grip. It’s all reminiscent of Rightmove, which has enjoyed a similar stranglehold over estate agencies and produced fabulous returns for its shareholders over the years. It’s no coincidence that Auto Trader’s chairman is Ed Williams, the founder of Rightmove and its former chief executive.
There is a little fog on the road ahead. New car registrations are expected to plateau or fall a little this year. That ultimately must feed through into lower sales volumes in the second-hand market. A likely crackdown by regulators on the murky car finance industry may also dampen volumes in the years ahead. It seems unlikely consumers will be trading in for a new car as frequently as they have in the past, especially if the economy continues to slow.
The shares are dear, trading on 27 times earnings for the year just gone and yielding 1.2 per cent. A continuous buyback programme, using the lashings of cash generated, should put a prop under the share price, but it could be vulnerable to macro-economic jitters in the months ahead. That would create a great buying opportunity. Even at the current share price, this is a class share worth giving garage space to.
My advice Buy
Why Quality company with hefty market power
AA
The roadside rescue business is struggling to make much share price progress because of several legacy issues. The AA pension deficit has been a particular thorn with investors. So has its past under-investment in the brand.
The company has addressed the first and seems to be making modest progress on the second. Bob Mackenzie, executive chairman, yesterday announced a replenishment timetable with pension trustees that will cost the AA an extra £8 million a year for two years, rising to £11 million and then £13 million, inflation adjusted.
At the annual meeting yesterday, he also committed to a £130 million capital investment programme in IT and further spending on marketing. Spontaneous brand awareness has grown from 91 per cent to 94 per cent in the past three years, which may not sound much but is an extra 1.8 million potential clients.
Sandy Chen at Cenkos, the broker, said that the pension settlement was slightly better than expected.
Investors yesterday vetoed AA plans giving it the right to issue the equivalent of as much as 10 per cent of the company’s share capital without a proper rights issue; 36 per cent voted against, enough to torpedo the plan. Quite right too.
My advice Hold
Why Progress has been made on pension and brand
CMC Markets
Investors could be forgiven for vowing never to touch CMC with a bargepole. The shares have almost halved since the spread betting business was floated last year. Its founder, Peter Cruddas, and his adviser, Goldman Sachs, both sold shares at that point, leaving a nasty taste with those persuaded to buy in.
The spread betting firm has been hit first by subdued trading volumes that tend to coincide with relatively stable financial markets. Spread betters prefer volatility. Second, the regulatory crackdown has dented sentiment. The Financial Conduct Authority is expected to rule this autumn on reforms to protect the wide-eyed investment novices who tend to get carried away and then carried out by the likes of CMC.
On the first question, results yesterday were encouraging. The number of trades was 6 per cent higher in the second half than in the first, while revenues recovered by 22 per cent. The number of active clients was up by 5 per cent on a year ago. On the second, CMC reckons that although it will probably be hit, it should be one of the sector winners in the long run. It has flexible home-built systems capable of adjusting to the new rules and excess capital.
After yesterday’s 5 per cent lift in the price to 134p, the yield alone is 6.6 per cent. Mr Cruddas has maintained the divi this year in spite of the profits fall. The short run path for the share price is largely in the hands of the FCA. Anything short of a draconian crackdown and the shares on a three to five year view look fairly attractive.
My advice Buy
Why Cheap valuation and the promise from white-labelling
And finally . . .
Ferreting out oil in one of the world’s poorest countries is not easy. The Chinese got pumping in Niger first, but the Aim-listed Savannah Petroleum is now drilling there too. Yesterday it announced it had entered a “binding exclusivity agreement” with an unnamed west Africa-focused business to buy almost all of its oil and gas assets in the region. Savannah said that it envisaged paying with a mix of debt, equity and cash. The deal would be classed as a reverse takeover, so the shares have been suspended at 34.62p, down 2 per cent.
