Rightmove gained 1,250% since IPO, is it time to sell?

Bit of background

Rightmove was conceived as a joint venture between four of the UK’s largest property agents: Halifax, Countrywide plc, Royal & Sun Alliance, & Connells in 2000 and got listed in 2006.

The firm bread & butter is selling advertising space to estate agents and offering additional advertising products. Now it displays up to 1.2m properties in the UK.

Now it is the biggest UK property internet portal with a 77% of the online real estate market and gives the shares are at all-time highs regarding market value, is there room for more growth?

 

Here are 10 crucial facts about its operating + financial performance:

Fact number 1: In 2004, Rightmove had sales worth £9m. Now, turnover grew to £192m, a 2000% increase.

As mentioned, it has 77% of market share Rightmove’s niche looks small.

Fact number 2: The website displays 1.2m UK properties which are put up by 19,000 advertisers (real estate agents).

 

Fact number 3: In 2004, net margins were 20% and that rose to a high of 70% before settling at around 57%.

Not surprisingly, its operational expenses have fallen from 72.4% of sales to 28.6% in ten years.

 

Fact number 4: Estate agents are drawn to Rightmove because it has huge website traffic numbers of 127m unique visitors per month, compare it to Foxton’s 500,000 visitors a month.

 

Fact number 5: With huge traffic, Rightmove can increase its advertising fees from £117 in 2004 to £830 per advertiser.

However, the levels of fees depend on the amount of fees an estate agent is getting.

For example, a typical Foxton real estate agent would make his/her fees from the following categories:

  1. Selling off your property, it’s an average fee of £12,990.
  2. To let out your property, that would be £3,355.
  3. And getting a mortgage, Foxton would charge an average £2,167.

 

These numbers looked good, but it depends on whether if Foxton and other estate agents are making money.

 

Fact number 6: Rightmove’s cash in the bank is £8m because it paid out a total of £170m in cash dividends and in addition, it bought back shares for treasury and cancellations of a total £424m since 2005.

This makes it a total of £594m being returned to shareholders. Though it gives investors’ confidences of a superior business model, just remember £594m has disappeared from the company’s purse and never to be seen again.

The moral here is regardless of its superior business model it pays dividends if Rightmove squirrel some cash away for a rainy day.

 

Fact number 7: Luckily, it has zero debt on their books, but using the Assets/Equity ratio makes Rightmove looks “overly-leveraged!”

The reason is an undervaluation of its non-current assets. Here’s why:

Source: Rightmove annual reports (Chart created by the writer).

 

Non-current assets turnover is five times during 2004-09, but to 20 times in its latest year.

If you make fixed assets turnover at five times, therefore their assets could be worth £38.4m, instead of £10m.

This “revaluation” would turn shareholders’ equity from £6.6m to £35m as total assets are revised to £78.8m giving its fixed assets turnover at 2.25 times, instead of a highly leverage of 7.6 times.

 

Valuation Talk

Current valuation gives Rightmove a market capitalisation of £4bn, but is it time to sell or is it a buy?

 

Facts number 8: The following is Rightmove valuations:

    
PE = 38 times’ earnings. EV/Sales of 20 times multiple.EV/EBITDA at 27.6 timesPrice to sales = 20 times.
Price to Book of 580 times.Free cash flow yield of 2.9%Earnings yield of 2.8%Price to Cash Flow of 33 times.
Dividend yield = 0.93%.NCAV of minus £3.78mCROIC* is 16.64 times.EV/EBIT = 27.9 times.
FCF to Sales = 0.575.

 

*is free cash flow/invested capital to give “Cash Return on Invested Capital.”

 

All the above multiples tell you the business is fundamentally over- priced, but are there still growth in Rightmove?

Fact number 9: The above valuation levels warrant a growth rate of 30% in earnings and revenue, but is Rightmove producing it?

No, because growth for both earnings and sales has slowed to the “low teens” and has been for the past few years.

 

Also, the number of advertisers has stagnated.

 

Fact number 10: It has competition from Zoopla.

The company has over 800,000 properties listed on its website and earn £361 per advertiser (half that of Rightmove).

 

 

Final assessment

Rightmove is a market leader in the UK property internet portal space.

And with revenue growth slowing to 16%, the market valuation is running ahead of itself.

The one thing to watch is UK property prices, and if it starts to fall, Rightmove would be adversely affected because lower house prices fetch lower fees, in turn, it lowers Rightmove’s revenue.

And with a low cash balance, the business has not saved up for a rainy day!

The shares have room to move lower rather than continue higher, and if you are a long-term holder (five years or more), then a decline of 30% would be a reasonable correction.

Rightmove is a superior business, and the market value has shown this.

But another superb business is Next, and their shares have lost 40% in the past two years, despite posting consistently good results.

It makes four times more in operating profits than Rightmove makes in sales, but Next’s market value is £7.8bn vs. Rightmove’s £3.9bn.

 

Verdict: To impersonate Gordon Gekko: “I like Rightmove at £23/share (which implies a forward PE of 20 times), but the current share price is an insult.”

 

Disclosure

I wrote this article myself, and it expresses my opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Plus, I do not own the stock of the company mentioned, unless stated.

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