UBS starts Auto Trader at 'sell', says market expects too much

UBS initiated coverage of Auto Trader with a 'sell' rating and 375p price target.

It said the company has leveraged a frothy used car market and a shift to online of dealer classified spend to grow inventory and execute price rises, but expectations for the firm are too high.

UBS said the current share price implies a FY17-26E revenue compound annual growth rate of 6.5% versus its expectations of 5.7% and margin expansion of 700bps, versus its forecast of 500 bps.

"Given we expect the used car profit pool to grow 2% per annum, this requires not only 800bps growth in market share and a doubling of adjacency revenue, but also a rise in classified spend as a share of dealer gross profits to 11% (we see it flat at 9%)."

UBS has assessed the company's revenue growth prospects and sees online classified spend slowing to 4% CAGR in 2016-25 from 11% in 2012-16. Used car prices are stabilising and dealership used car transactions are back to peak, it said.

The bank reckons Auto Trader can use prices increases and upselling to up its market share to 75% by FY26 from 67%. However, further increases will be challenging, as the current Auto Trader price premium captures a large portion of the customers' perceived value.

"Furthermore, while a significant portion of car dealers may be willing to increase their spending with Auto Trader to boost stockturn, we are concerned that the long tail of dealers (which represent 44% of stock on Autotrader.co.uk) may resist price increases if the number of leads they receive starts to fall.

"As a result, we only expect Auto trader retailer selling revenue to grow at an FY17-26E CAGR of 5.5%."

At 1030 GMT, the shares were down 1.9% to 394.50p.