Online classifieds dealer Carsales.Com Ltd (ASX: CAR) released its results for the half-year to 31 December 2016 this morning. Although revenues rose, profits fell due to the under-performance of a key business. Here's what you need to know:
- Revenues rose 7% to $179 million
- Net Profit After Tax (NPAT) fell 8% to $47 million
- Earnings Before Interest, Tax, Depreciation, and Amortisation (EBITDA) rose 2% to $83 million
- Interim dividend maintained at 17.8 cents per share
- Strong performance in dealer revenues (up 10%), private seller revenues (up 26%), and South Korean business (+26% in local currency)
- Finance revenues from Stratton Finance fell 13%, cost reduction program in place
- Outlook for 'solid' revenue, NPAT, and EBITDA growth for full year 2017
- Founder and CEO Greg Roebuck to retire
- Ongoing integration of recent acquisitions expected to provide boost to profits in second half
So What?
I was sceptical about Carsales, feeling that the market's price tag for its shares overrated the company's growth prospects. In a sense I was correct, but for the wrong reasons. The under-performance of Carsales' Finance segment (which provides car loans) hit the results hard and resulted in a 7% hit to both revenue and segment EBITDA. Excluding the Finance segment, revenues would have risen 14% and segment EBITDA by 9%.
Now, that is still a concern because it is not certain if this part of the business can return to its previous strengths. Management stated previously that the decline was due to 'temporary' volume capacity reduction at a major lender meaning that Carsales couldn't issue as many loans. That was in Q4 2016, it's now six months later and that segment is still suffering the same constraints. Management noted that it was aiming to bring additional lenders to its panel and attempting to lift conversion of leads to sales, since the actual lead generation remains strong. It appears this segment's performance could recover in the future.
The core business, however, continued to perform very strongly and indeed much better than I expected. Both dealer and private listing revenues grew quickly alongside a 3% and 4% increase in volume, respectively. Carsales increased its free ad threshold to $5,000 (ad is free if the vehicle is worth less than $5,000) and also increased ad pricing for both its dealer and private customers.
Now What?
Another decent performance from Carsales, although the international sector remains a miniscule part of the group's overall operations. Most of the money comes from Australia and here the company continues to succeed. An increase in advertisement volumes and inventory suggests that Carsales' competitive moat remains intact, although the new free under $5,000 (previously $3,000) policy suggests that the likes of Gumtree and/or Facebook (which are free) could be having an impact.
Furthermore, Facebook recently launched its Marketplace feature, which is shaping up as an important prospective competitor. I'm inclined to believe that Carsales' niche, which involves deep specialisation in one area – vehicle sales – will give it the edge over Facebook's broad generalisation. However, this is something investors will want to watch and it would be foolish to write off the social network as a non-starter. Declining listing volumes would be an important warning sign.
Foolish takeaway
Carsales continues to perform well in its domestic business, and the international websites are growing respectably off a low base. Yet it increasingly looks as though the domestic business is mature, and international businesses are not big enough to grow the company on their own. I like Carsales a lot, but with the challenges it faces I think it is important that investors don't overpay for its shares today.
