We set our target price at EUR 26 based on an equally weighted average of a DCF (10% WACC, 3% LT growth) EUR 22.9, dealer multiples (6.5x EV/GP) EUR 25.2 and SOTP EUR 29.9.

We flag the following risks to the achievement of our target price:

Autohero underperforms - One of the most significant risks is that online penetration of the European second-hand car market does not grow as quickly as anticipated. As Auto1 is set to accelerate the growth of Autohero, there is execution risk that could lead to it not meeting expectations.

Car supply disruption has larger than expected impact - New car sales dropped as a result of the COVID-19 pandemic and this may see a shortage of second-hand inventory as this works its way through the system over the next 12-36 months.

Dealer end-market consolidating & declining - While dealers are currently a major source of revenue for Auto1, there is a risk that a more rapid decline in the dealer market could lead to greater than expected pressure on the merchant channel.

Changing European regulations - We view the main regulatory risks as follows. 1) Increased regulation of consumer lending which may limit the potential finance income upside for Auto1. 2) The requirement for a shift to electric and hybrid vehicles which may see subdued market volumes for a period and more uncertain pricing in the second-hand car market. 3) Any change in distance selling regulation which would give the customer a longer period to return products. 

Increasing competition and backlash from dealers - Auto 1 has traditionally focused on sourcing cars from consumers and dealers to sell to other dealers across Europe. The risk is that dealers may see Auto 1 as taking the better cars to sell themselves directly to consumers and leaving the remainder to sell to the dealers. Autohero intends to be price competitive for the consumer but not necessarily a price leader. In other industries, we have seen low-cost operators drive down margins and given the size of the European car market it may be an attractive opportunity for a new entrant with sufficient liquidity to drive down returns.

Reputational risk due to poor customer service - As part of the B2C offering, Autohero undertakes a number of checks on each vehicle as part of the pre-sale process and if mistakes are found to have made during this procedure or issues identified that were not picked up it may undermine consumer faith in the brand.