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(Sharecast News) - Auto Trader rallied on Tuesday as UBS upgraded the shares to 'buy' from 'neutral', arguing that the risk/reward has become attractive going into the first-half results.
UBS said the recent selloff was overdone.
"The company is a quality compounder and has delivered an 8% historical revenue compound annual growth rate through a combination of price increases and product innovation. Yet its revenue still only represents circa 5% of UK used car dealer gross profit," it said.
"Further, we see an opportunity to accelerate growth to 10% by enabling consumers to buy cars from dealers online."
UBS said the share price drop has been driven by concerns that Auto Trader could be impacted by a UK recession and lower market transactions.
"At 19x consensus FY24E EPS, we estimate the market is pricing in a circa 15% cut to consensus FY24E EBITDA. However, we believe this is too pessimistic, given Auto Trader core revenues are primarily driven by the number of listings on its website, and not by the number of end market transactions."
UBS noted that due to new car supply issues, listings are already 8% below 2019 levels, and listings only fell by 10% following the Great Financial Crisis.
"We think H1'23 results (due 10 November) could be reassuring to investors and a positive catalyst," it said.
UBS cut its price target on Auto Trader to 600p from 710p.
At 1250 GMT, the shares were up 3.3% at 538.60p.
