Carly Holdings Limited - Better Subscribe than Buy

207 Views07 Dec 2022 08:00

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SUMMARY

Carly Holdings Limited (ASX:CL8) launched its car subscription business in March 2019, leveraging the existing DriveMyCar operations and technology. Car subscription allows business and retail customers to pay a single monthly fee to access a car for 30 days or more and is an alternative to purchasing or financing a vehicle. The average subscription period is 5.6 months. Carly has attracted larger automotive industry businesses as shareholders, with a model that adds value to all levels of the industry which facilitates sales volumes and delivers a new recurring revenue stream for automotive manufacturers and dealers. The company developed the model on similar lines to business launches in Europe and proved over the past three years that the business works in Australia. The impact of COVID-19 on supply chains over the past two years held the company back due to poor supply of vehicles from both corporate owners/suppliers (asset light approach) and manufacturers (asset purchased approach). Carly is now ramping up fleet size through vehicle purchases and leases while achieving fleet utilisation of 87.5%. Increased vehicle availability is expected to drive subscriber growth while the company maintains tight cost controls to drive gross margin or share of subscriber transaction values, up from the current 51% level.

Business model

Carly provides vehicles to business and retail customers for periods exceeding 30 days under a subscription model. The subscriber pays a flat monthly subscription fee which includes exclusive use of the vehicle, insurance, registration and servicing, otherwise they are responsible for fuel and tolls. Vehicles are sourced by Carly via two models; an external owner provides a vehicle in return for a share of receipts (asset light) or the vehicle is secured through a vehicle finance lease or purchase of the vehicle by Carly (asset heavy). Carly is currently in the top-two organic results for ‘car subscription’ internet searches with vehicle supply still the main constraint on growth. An important enabler of future growth will be increased asset finance for vehicle purchases for the owned (asset heavy) subscription model, enabling Carly to more reliably increase fleet size.

Growing a successful model in FY23

Vehicle markets have been under stress for two years due to COVID-19-related supply issues. Carly has proven the car subscription model works in Australia as it does in Europe. The company’s task is now to scale up the model and address the issues of supply which have constrained growth. Quarterly results have been reassuring with cost controls strong and vehicle deliveries increasing – 70% of vehicles ordered under the $1.5m asset finance facility announced in June 2022 were delivered and rapidly subscribed by October 2022. Carly adds value to automotive industry businesses and is strongly supported by the broader industry and large shareholders SG Fleet (ASX:SGF) and Turners Automotive Group (ASX:TRA). With additional finance available we expect strong subscription growth in FY23. Carly closed a rights issue in November raising $2.1m.

Valuation base case at $27.1m ($0.132/share)

Our valuation is based on the discounted cashflow methodology using a discount rate of 16.5% (beta 2.0, risk-free rate 3.5%). We have modelled three cases differentiated by available finance for vehicles, subscription levels and vehicle-related costs. Our downside case values CL8 at $5.6m ($0.027/share), while we can estimate upside to $90.3m ($0.442/share) using a range of factors. Financing to enable an increase in vehicle purchases is the crucial factor in these valuations, together with ongoing growth in fleet size and stable vehicle utilisation rates.

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