Berenberg puts brakes on Auto Trader

Shares in Auto Trader skidded on Wednesday after Berenberg initiated coverage of the stock at 'buy' with a 350p price target.

It said that while the company has a clear market-leading position and is likely to report solid top-line growth in the coming years, growth may be slower and less profitable than consensus is expecting. It added that the stock's valuation is unappealing, particularly relative to its online peers, with downside risk to the premium multiples.

The bank pointed out that classified websites like Auto Trader's are the strongest and have the most pricing power when markets are fragmented.

"However, we expect car dealer consolidation to continue, which could put downwards pressure on both pricing growth and stock levels. Additionally, while used-car sales in the UK are at record levels, supported by a boom in personal contract finance, our analysis suggests this level of transactions is at risk and that tighter credit requirements may soften used car demand."

Electric vehicles, car sharing and autonomous cars could all have a negative impact in the medium to long term, Berenberg added.

The bank also highlighted margin pressures ahead, noting that the majority of revenues from Auto Trader’s new products come with lower margins than the high-margin digital classified model. This, combined with higher costs for digital talent in Manchester, could lead to a slower-than-expected margin development.

At 1232 BST, the shares were down 4.6% to 400.10p.