Trialling a New Car Model

Trialling a New Car Model

Carsales (ASX: CAR) has an indirect investment in carconnect, a site that’s trying to disrupt the way new cars are sold in Australia. Many people dislike haggling with dealers, so carconnect has flipped the model to make dealers tender for your business online. Sounds great for buyers right? But what’s the potential upside for Carsales?

First, let’s consider the potential market share of carconnect. The site currently sells over 2,000 new cars per year, compared to the 1.2 million new cars that are sold in Australia. Carwow is a similar company in the UK which claims to comprise 3 per cent of new car sales on their site, and they’ve been operating for 3 years. So let’s say that carconnect could become 5 per cent of Australia’s new car market over time. How much revenue can it generate?

Carconnect charges 1  per cent of the new car price, which is currently around $40,000 on average. If carconnect is popular and becomes 5 per cent of the new car market, it could generate $24 million of revenue per year.

But what about profitability? We don’t know how profitable Carconnect is, and its profits will likely be supressed over a sustained period as it tries to gain market share. But a good reference for an upper limit would be the 60 per cent EBITDA margin that Carsales generates with its dominant local business. On $24 million of revenue, carconnect would generate around $14 million per year in before tax profit.

Now there’s a few caveats here to consider. Carconnect would not become 5 per cent of the new car market overnight, and the time value of money means a lower value to Carsales than these headline numbers suggest. A successful product could also mean higher ancillary revenues, like display advertising, but it could also mean cannibalisation of Carsales’ enquiry-led model.

But most importantly, Carconnect is an investment of Stratton Finance, and Stratton Finance is 50.1 per cent owned by Carsales. So Carsales would only receive around $7 million in annual earnings with this example. This compares to the $150 million in EBITDA that Carsales generates each year with its core business.

So taken together, while this service may become the “future of car retailing” the potential value to Carsales from Carconnect appears modest at this time. As such, your main consideration for an investment in Carsales remains the strength of its dealer focused, enquiry-led model.

The Montgomery funds own shares in Carsales.