The Carsales.Com Ltd (ASX:CAR) share price fell 2.6% to $12.18 this morning after it released its annual report. Here's what you need to know:
- Revenue rose 8% to $372 million
- Net profit after tax (NPAT) rose 0.2% to $109.5 million
- Adjusted net profit after tax (ANPAT) rose 8% to $119 million
- Net debt of $153 million, down from $198 million
- Outlook for 'solid' revenue and profit growth in core business
- Outlook for continued improvement in Stratton finance, plus continued scale up of ancillary services
- Expecting continued growth in South Korean, Brazilian, Chilean, Argentine, and Mexican businesses
So what?
First it is necessary to address the elephant in the room – the adjusted net profit. Adjusted net profit rose because management excluded two key costs – a $7.1 million impairment on the carrying value of their iCar Asia Ltd (ASX: ICQ) investment, and a $3.5 million impairment to intangibles relating to acquired brands and relationships.
The intangibles impairment is consistent with last year, but excluding the loss on iCar Asia from results is a bit cheeky I think. This was an investment decision that reflects a real loss to the shareholders. It may be illustrative to present the results without iCar in them, as iCar is now classified as 'available for sale', but I disagree with excluding it from company earnings.
What's more, the decision to exclude the loss specifically benefits corporate pay packets:
"In addition, all of the one-off items of a corporate nature incurred in the FY17 year excluded in calculating adjusted NPAT (such as the associate fair value revaluation loss) as set out on page 82 have been excluded from the calculation of the achieved EPS (for the remuneration report)."
I propose an alternative profit measure, Sean's adjusted net profit after tax (SANPAT), including iCar, is $112 million, reflecting 1.3% growth. Alternatively, cash flow from operations grew 4.4%, in line with earnings before interest, tax, depreciation, and amortisation (EBITDA), which could be another appropriate measure to use.
Now what?
Carsales is a great business. Its key metrics, such as cars available for sale (excluding iCar Asia), earnings at its ancillary services, and earnings at its international websites are all growing strongly. The company's leadership have long-term mindsets and are very experienced.
Some of the revenue growth is in less profitable businesses, which may strengthen Carsales's network effects, and the growth for its core Carsales.Com product appears to come primarily through price increases. However, some of this year's report struck a false note with me, including the above treatment of iCar as well as hugely bullish statements like:
"IT HAS BEEN AN AMAZING YEAR AT
CARSALES, DURING WHICH MANY NEW
MILESTONES WERE REACHED AND
CHALLENGES CRISPLY OVERCOME."
Unfortunately, my view is that Carsales is not growing fast enough to justify today's price of $12.50 per share. I like the business a lot and would own it at the right price, but I'm steering clear for now and previously sold my shares around today's prices.
