Below is my forecast of RIGHTMOVE PLC valuation and its share price projection. The post will feature a mixture of fundamental and technical analysis. You will get some macro factors mix in to explain the company’s business and justifying my arguments.
Let’s get started.
Source: RIGHTMOVE’s ANNUAL REPORTS.
These wide-ranging metrics are telling you RIGHTMOVE has an overvaluation of 19.88%. It means the current share price of £39.35/share should be £32.38/share, based on 10 years of historical data.
Explaining these Market Metrics
Operating cash margins is a measure of profitability. The inclusion is to show RIGHTMOVE increasing efficiency in their operations. Also, to emphasise the firm is taking advantage of its economies of scale.
RIGHTMOVE’s operating cash margins is 16% higher, then the 10-year historical average. But, does it justify the higher valuation?
Yes, because the company is earning more with smaller proportional increase in sales.
Yet, RIGHTMOVE needs to maintain this level of performance year after year. The reason is there are no build-up of its cash reserves for a rainy day. So, a 5%, 10% or 20% fall in margins would see the market recalibrate RIGHTMOVE’s valuation.
P.S. The size of the fall will depend on market sentiment on the housing market and its effect on RIGHTMOVE.
Technical Analysis of RIGHTMOVE
Below is both the weekly and monthly chart, with RSI and MACD as your momentum indicators.
SHARE PRICE CHART 1
On RIGHTMOVE weekly share chart, there is no significant pattern. Apart from RIGHTMOVE’s shares moving higher, then consolidating its position. After a period, it moves higher, then consolidate and move higher. (A pattern unbroken since 2009)
Also, the 200-day moving average is an extreme support area for RIGHTMOVE. The shares never touched below that trend line once since 2010.
SHARE PRICE CHART 2
The monthly chart didn’t display anything special, apart from the RSI indicator. It is an interesting pattern because since the shares ascent, the RSI monthly chart hasn’t gone below 50.
A second pattern is the display of “THREE” lower-highs, each time the shares move to new highs. For me, it indicates that RIGHTMOVE needs to continue producing extraordinary results. Or, face a more severe pullback in the share price.
If RIGHTMOVE fails to perform, the company risk breaching below 50 on the monthly RSI chart. That means the shares could follow the pattern of NEXT PLC. (A similar company to RIGHTMOVE with extraordinary margins.) You should discount a 50% drop in the share price.
MACRO FACTORS AFFECTING RIGHTMOVE
My favourite part.
Those who understand history will be alert to future events and new history in the making.
Back in 2008/09, RIGHTMOVE saw its shares fell 70% during the financial crisis. One culprit is falling UK house price.
P.S. Ignore the headline “1. Annual Rates of House Price Inflation”, it is part of the chart!
UK House price fell by 18% that financial year, caused by more supply than demand. The effect on RIGHTMOVE business is simple to explain:
- Lower house price means LESS PROPERTY TRANSACTION FEES for estate agents.
- Lower transaction fees mean the “economics” of listing on RIGHTMOVE don’t make sense.
- When fewer people looking for a home it equals less traffic.
A second problem to consider is lower house price effects on the number of property transactions.
RIGHTMOVE Round UP
When UK property price goes up, the estate agents earn higher fees. Also, there are more participants as mortgage lending rules are loose.
RIGHTMOVE benefits from higher estate agents’ earnings, along with higher property turnover. It makes more affordable to list on their website.
When UK property price goes down, the estate agents earns fewer fees. Also, there are fewer participants as the banks tighten lending rules for mortgages.
RIGHTMOVE would struggle to attract more estate agents as they earn less fees as property turnover is low. This would force RIGHTMOVE to lower advertising prices.
RIGHTMOVE PLC at £39/share or over £3.7bn market valuation is fair value for my money. It has cornered the internet portal space and established a long-term business proposition.
The problems RIGHTMOVE have going forward is increasing advertising fees. Because at £822/month or £10k per year this looks high. Twelve years ago, RIGHTMOVE was charging £117/month on advertising, and the rise is faster than UK home prices!
Secondly, UK house price is at a record high, is this sustainable? Are people wages catching up with property prices? Will the lack of supply continue to keep home prices high? With prices rising faster than pay increases, is it sustainable?
Third, the effect of government regulation on housing that could lower house prices in the South. The rise in stamp duties can lead to higher level of home purchases in the North of England. Or, we could view stamp duties having the less instrumental effect because of the lack of job opportunities plays a crucial role on the location of home purchases.
For RIGHTMOVE to sustain their share price rally, it needs to increase earnings at a double-digit pace. UK home prices are on a single-digit growth rate. There will come the point that property prices could fall in the UK to get its balance.
Also, people shouldn’t sleep on a rise in interest rate upsetting the property sector unsustainable growth.
The opinions are expressed independently by the writer. It is for entertainment and research purposes and not taken as investment advice. Data is correct on available information at the time.
Finally, the writer does not own the company’s stock, unless stated otherwise.
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