FY2019 Results - Reality

I always get bit suspicious when a company starts to make theirfinancial reporting difficult to understand especially when the business modelis relatively simple because most of the time the intention is to hide poorperformance. The recent jump in carsales share price brought my attention tolook at their results and after digging deeper into their financials, I found avery poor set of results and a company that is trying to create a rosy picture bycreating fancy terms like "look through" earnings to confuseinvestors and earning one-off gains from purchasing 50% of SK Encar.

If you exclude the one-off gain from buying the remaining50% stake in EK Encar, the overall revenue increased by mere 2% and theadjusted EBITDA decreased by 2% (yes! you read it right, it’s minus 2%).

After seeing the above numbers, my suspicion started to grow more so I looked at theirlast year’s results and here is a snapshot of carsales FY2018results presentation - Slide 6.

And now, have a look at the FY2019 results presentation - Slide 8 (seebelow) and to my astonishment, I found the financial numbers reported in FY19 forprevious years to be different from what was reported in FY18. It appears thatthe numbers are depressed (by suspicious accounting) in FY19 results to showstrong growth.

Going back to SK Encar, carsales paid $244 million to buythe remaining 50% stake in the company. The direct result of this stake was again of $16.3million in EBITDA in FY19. To comment on the purchase price, carsales paid 14xEBITDA to buy the remaining 50% of SK Encar, which in my opinion is high given that onunderlying basis, SK Encar’s EBITDA only grew 13% last year.

To add more to my confusion on the results, the company stateda “solid” performance forecast for 2020 without actually giving any real financialforecast.

Carsales is currently trading at P/E multiple of a growthstock, P/E = 28. As I highlighted above the growth is actually not there and I don’tsee where the near term growth will come from.The vehicle car sales figures in Australia are in a downturnwhich is not surprising since the global automotive industry sales are nearingrecession levels. And those who are banking on strong growth in future fromLatin America, I suggest you google the current economic climate in Argentina,Brazil etc. and then see if you still think that these countries will provide a “solid”growth in near future.

To summarise, In my opinion, carsales share price is trading much higher than where it should be given the weak results and the global automotive industryfundamentals in near term. By applying a generous P/E multiple of 16 ( average for ASX),I get a share price valued at $8.64, a potential downside of -44%.

Disclaimer: The above information is based on myopinions only and in no way should be taken as an investment advice.