Cube Midcap Report (Thur 6 June 2019) – AUTO, GOG

Cube Midcap Report (Thur 6 June 2019) – AUTO, GOG

Transport edition

Morning all,

The main news for me today is the final results statement from AutoTrader.


Auto Trader (AUTO)

  • Share price: 588p (unch.)
  • Market cap: £5,460 million

Final Results

This is a share I’ve been meaning to get my teeth into for a while.

One of my most successful investments last year was Rightmove (RMV), which has appreciated by nearly 30% since purchase in November 2018. I am eager to increase my exposure to online “marketplaces” – and Auto Trader is as good an example of this as you will find.

Let’s consider the most recently reported numbers, for the year ending March 2019:

  • revenue +8% (£355 million)
  • operating profit +10% (£244 million)
  • cash generated from operations > operating profit
  • shareholder returns more heavily weighted to buybacks than dividends (policy is to distribute approximately one third of net income as dividends).

Operationally, the numbers are equally strong. In the same way that Rightmove drives price increases from estate agents, Auto Trader is driving revenue increases from Retailer forecourts: up 9% to £149 per month. The main contributor to this was the addition of new products: stock exports, profile pages and Dealer Finance (finance offers being advertised with cars).

On the product development side, dealers now have access to enhanced analytics, enabling them to better predict how quickly their stock will sell. While talking to a dealership recently, I saw how they really value these AutoTrader metrics.

The “Home Trader” segment declined, but that is a tiny segment of the overall business.

Sources of trade revenue:

Natural Monopoly

While the audience engagement numbers are flat, they are reportedly almost 5x larger than Auto Trader’s nearest competitor, Gumtree (versus 4x a year ago).

80% of auto retailers advertise on Looking at the competition, I see that currently has in the region of 330,000 used cars for sale. The average number of physical cars advertised on was c. 460,000.

So while does have a wide selection of vehicles, it clearly has nothing like the engagement of The share of time spent on (aggregating with gumtree, Pistonheads, and cargurus) is  76%. The nearest competitor must be c. 15%.

This speaks to the presence of a natural monopoly, whose market strength is only increasing. Pretty much the perfect type of company to invest in!

Resistant to Cylicality

Despite the decline in transactions in both new and used cars, AutoTrader has continued to do well:

“…the size of the overall UK car parc continues to grow which benefits our stock-based business model.”

So more cars in the economy means more growth for AutoTrader, so long as they continue to be advertised at regular intervals.

Used car prices also remain “buoyant”, rising 3.5% during the year. This gives us a cushion against the more volatile new car market (although AutoTrader has added major functionality in new cars, too).

B2B Joint Venture

This sounds interesting. has formed a joint venture with Cox Automotive, the owner of and many other auto brands.

The JV is called Dealer Auction and runs B2B vehicle auctions. Perhaps this is only the beginning of the co-operation with Cox?

Balance sheet

The balance sheet is very modestly leveraged at year-end, with £313 million drawn from a revolving credit factility. We can compare this with £258.5 million of cash generated from operations.

The capital allocation policy, as stated, is both simple and sensible. The company distributes one third of net income as dividends, makes the investments necessary for continued growth, and distributes the rest in the form of share buy-backs or debt reduction. The Board seeks the continued authority to repurchase up to c. 10% of shares outstanding.

My view

The metrics are terrific, as you would hope for. To give some examples, there is operating margin of 69% (2018: 67%), and return on tangible capital employed is mind-boggling: the net working capital requirement is c. zero and PPE is sub-£20 million.

When it comes to valuation, however, I think the shares might be around fair value currently. I think this article at SharesMag correctly identified the opportunity last year.

As of today, AutoTrader enjoys a valuation comparable to Rightmove (PE ratio c. 26-27x, EV/EBITDA c. 24x).

Therefore, while I do intend to add AutoTrader to my portfolio, I may only do so in small size at the current valuation.

Go-Ahead Group (GOG)

  • Share price: £20.39 (+8%)
  • Market cap: £5,460 million

Final Results

This bus and rail service provider has announced a positive trading update:

  • London/international bus division is doing better than expected, helped by strong performance in Singapore and Dublin.
  • Regional bus division in line with expectations. Southeastern performing “well”.

To give some context for the Dublin expansion, Go-Ahead received nearly 400 complaints in the first few months of operating its new bus routes. This was considered normal and in line with expectations. More Dublin bus routes were opened by Go-Ahead last December and in March, and more are coming online later this year.

Given the staged expansion, I would say that the authorities in Dublin must be very content with the company’s performance.

In London, most existing Go-Ahead contracts have been settled recently, turning the focus to bidding for new contracts in the years ahead.

I don’t see any compelling reason to buy these shares, but they are “cheap” at a forecast P/E multiple of 11x.

Mitie (MTO)

  • Share price: 151.6 (+9%)
  • Market cap: £556 million

Final Results

Decent numbers from Mitie. This is another “cheap” stock but the quality of its activities is highly questionable.


Going to hang up my pen there for today. We are back tomorrow.

All the best




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