Carsales.com has experienced better trajectory in volumes since Easter, signalling to brokers that business may be more resilient than initially expected.

-Dealer support measures extended into May
-Private listings more likely to be constrained for longer
-South Korea robust, as earnings and revenue grow
 

As the impact of the coronavirus crisis deepens, Carsales.com ((CAR)) has ratcheted up its dealer support. Enquiry volumes have slumped -25% since March 10, although brokers highlight a better trajectory since Easter.

This indicates there is some resilience in the business and bodes well for when restrictions are lifted. Still, Macquarie suspects the quality of leads is likely to be low, given a lack of sales and, hence, the dealer support initiatives have been forthcoming.

These include a halving of all fixed and variable advertising charges for May and deferred dealer payment terms by 30 days. Morgans had previously estimated the cost of the April fee holiday at $15.5m and assesses the addition of -50% fee holiday in May and other measures will comprise at least another $10m in FY20, also assuming a further $7.5m of assistance in early FY21. Macquarie agrees some support is likely to extend into June.

Other measures include reduced discretionary expenditure, temporarily standing down 250 personnel and board and executive remuneration cut by -20% for three months. UBS estimates the impact of these measures could amount to $5-6m in the second half of FY20. Lead volumes may be soft but domestic inventory and traffic on the company's sites remain robust.

While Carsales has market power and can charge full price for advertising, Morgans suggests it has a vested interest in keeping as many dealers afloat as possible. The broker acknowledges there are risks of a further slowdown in the vehicle market in Australia and stronger competition from major rivals and expects market conditions will improve gradually over the next 3-5 years.

The trading performance since Easter suggests the market is more resilient than Goldman Sachs had anticipated but fourth quarter revenue is now likely to be affected by an additional -50% discount in May. The broker, not one of the seven monitored daily on the FNArena database, estimates the cost initiatives will save around $12m in FY20 and retains a Neutral rating and $14.70 target.

In addition, Macquarie assumes Carsales skips a price increase in 2021, given it implemented an 8% price increase in the primary product in 2020. Credit Suisse agrees that, given listing costs are reasonable proportion of dealer gross profit, it is unlikely the company will be able to put pressure on the pricing lever to the same extent in the medium term.

Listings

In the case of private listings, these are expected to be more constrained as social distancing measures and broader health considerations prevent people interacting for test drives and inspections. Carsales' domestic site remains primarily a used car marketplace, with new cars accounting for less than 20% of inventory.

Credit Suisse also points out that analysis of the GFC shows that used car transactions were more resistant to an economic downturn compared with new car sales, although suspects restrictions on movement this time around could mean used car sales also suffer.

In New Zealand, transaction data is available for March which shows that the decline in used car transactions, while not as severe as for new car sales, was -18%. As full restrictions on movements were not in place there until the end of March Credit Suisse suspects declines in April will be much worse.

The broker considers it unlikely transactions will pick up in the near term and assumes an impact on the Australasian business from the pandemic will continue into the first half of FY21. No second half dividend is expected, in order to conserve cash. Macquarie assesses Tyresales volumes are likely to deteriorate substantially amid reduced driving but this is a low-margin business so the impact is likely to be minimal.

South Korea

The performance of the Korean operation, SK Encar, has driven growth in revenue and earnings, revealing what happens as an economy emerges from the main wave of the pandemic. Macquarie notes new car sales are reportedly up 9% in March in South Korea. However, Credit Suisse points out South Korea never entered an economic shutdown.

The local strength can also be attributed to a preference for private vehicles over public transport and a cut to consumption tax. There are other issues too that affected vehicle sales in that country early in the year. Declines in new car sales over the first two months of 2020 were attributed to production shutdowns and supply chain issues from China, which has since returned to some normality.

In contrast, Brazil is starting to experience a more significant impact from the coronavirus, with lead volumes down -30%.

Despite the circumstances, Carsales is a robust business, Morgans asserts, while Macquarie upgrades to Outperform, believing the stock now offers upside.

UBS is less emphatic, factoring in soft conditions to the end of 2020. One large regional dealer network the broker consulted was experiencing -60/70% sales volume declines in late March/April and budgeting for -30% declines by the end of 2020.

For Morgan Stanley the depth of the downturn and extent of the eventual recovery are the key issues and, while it is too early to call a bottom in revenue momentum, retains an Overweight rating on a 12-month view. FNArena's database has three Buy and three Hold ratings. The consensus target is $15.21,suggesting 14.5% upside to the last share price.

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