HOLD Carsales.com Ltd (CAR)

Life has been turned upside down for Carsales since we upgraded it to a buy on March 18. Although most dealerships remain open and test drives are still permitted, the market has slowed sharply.

Carsales waived its charges to dealers in April and is giving a 50% discount in May. It has also deferred payment of advertising invoices.

As a result, the number of cars listed in April rose from around 210,000 to 230,000, as they took longer to sell but were kept on the site. With the (lower) charges reintroduced in May, the number of listings has fallen to about 210,000.

Website traffic has remained resilient as people have used their spare hours at home to browse for cars, which bodes well for a sharp recovery as restrictions are eased.

Carsales is also reducing costs, temporarily standing down around

250 staff in Australia and cutting board and executive pay.

It has a reasonably strong balance sheet, with net debt of $355 million at the end of March, amounting to about 1.7 times 2019 EBITDA. Available liquidity of about $190 million almost covers annual operating costs ($207 million in 2019) before costcutting measures.

Carsales is a high-quality business and may emerge from the current crisis even stronger. It’s also reasonable value on a multiple of about 26 times the underlying earnings per share achieved in 2019 and about 22 times consensus expectations for 2022.

With the price now up almost 20% since our upgrade, however, the buying opportunity has passed and we’re shifting back to HOLD.