How Auto Trader's dominance keeps driving growth

With plenty of issues affecting demand and buyer behaviour in the UK car sector, our head of markets runs through annual results from this £5 billion industry leader.

Auto Trader Group (LSE:AUTO)’s dominance in its market continues to drive growth, despite the ongoing challenges within the wider car industry.

An increase in operating costs and the acquisition of Autorama, aimed at increasing its foothold in the new car leasing market, both muddied the water and resulted in a net debt position at the end of the year. Pre-tax profit of £293.6 million for the 12 months to 31 March compared to £301 million the year previous, although the number was comfortably ahead of the expected £272 million.

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Revenues of £500.2 million were a shade above estimates, and 16% ahead of the corresponding period last year, with Auto Trader continuing to pull different levers in order to wring additional sales against a challenging backdrop. In the overall UK car market, while new car registrations were ahead by 3% year-on-year, they remain down by 19% compared to pre-pandemic levels, largely due to ongoing supply chain issues.

In some ways, the constrained new and indeed used car market supply has played into the group’s hands, with cars selling faster than at any time over recent years. These factors combined to reduce the average number of cars listed by the group by 14%, but not at the expense of its income from retailers, which are something of a lifeblood to the business. Average revenue per retailer increased by 10%, while the overall number of forecourt and website visits are both greater than those prior to the pandemic.

Auto Trader has also tweaked its offering and following a redesign is now providing a suite of options which are higher yielding. These revised packages, which include its Enhanced, Super and Ultra offerings, are already gaining traction and have not destabilised the group’s trading demand. The company estimates that 75% of minutes spent on automotive classified sites are with Auto Trader, and that it remains seven times larger than its nearest competitor.

This also reflects an evolving landscape where car buying is increasingly conducted online. Auto Trader recognises that the need for physical showrooms will retain some attraction for several years to come, but the shift towards online will also help fend off some emerging competition as the likes of Cinch and Cazoo ramp up their presence, mainly through advertising. In addition, the digital offering continues to spawn new products such as the “Market Extension” product, which allows retailers to sell stock outside of their local area and thus increasing their own potential market.

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With operating margin maintained at 70%, a share buyback of around £150 million during the period and with a small increase to the dividend which retains a fairly pedestrian yield of 1.3%, the group continues with a conservative approach which includes bearing down on costs.

The outlook from the company is positive, underpinned by price increases to its customers which it has been able to introduce without any measurable impact on sales. There are of course concerns around the propensity of the end-consumer to be making such big ticket purchases in the current climate, although the current imbalance between supply and demand is, for the moment, masking any precipitous falls.

In the meantime, Auto Trader continues to keep the competition at bay given the diversity and choice of its offering, and a scale which few competitors can currently match. The overarching concerns of a UK economy which has struggled to make any meaningful growth has had some impact on the share price, although a gain of 7% over the last year compares favourably with a decline of 1.2% for the wider FTSE100, with more recent momentum resulting in a spike of 11% over the last six months.

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Some wariness around the wider car market and indeed economic prospects limit the market consensus on the shares to a 'cautious buy', although this broadly positive general view reflects the group’s current dominant position and associated prospects.