Rightmove: Downgrade To Neutral Following H1 Results And 41% Gain (OTCMKTS:RTMVF)

Introduction

We have been tracking Rightmove (OTCPK:RTMVY) (referred here as “RMV”) closely, as we believe it to be one of the highest-quality businesses in the U.K., and last upgraded it to a Buy in March after its share price crashed after COVID-19 had spread to Europe; since then shares have rebounded 41.2% (in GBP in London trading). Our previous Buy rating, maintained between March and November of 2019, resulted in a similar 29.6% gain:

In this article, we review RMV’s H1 2020 results released on August 7, update our forecasts, and downgrade our rating to Neutral on valuation grounds.

Buy Case Recap

Our March 2020 upgrade to Buy saw the shares offering an attractive return even with a sharp COVID-19 impact and a slow recovery thereafter, based on:

  • RMV’s approx. 76% EBIT margin and £32.1m net cash would allow it to survive even large and extended revenue losses
  • We assumed declines of 30% in revenue and 40% in EPS in 2020, a small recovery in 2021 and earnings back to their 2019 level by 2022
  • We assumed dividends of 7.2p per share to continue to be paid, but no share buybacks until 2022
  • We believed thereafter RMV’s dominant market position and value-add to customers would help its earnings resume a high-single-digit CAGR
  • We assume a 30x P/E at 2022 year-end, implying an exit price of 582.9p

Compared to the share price of 440p at the time, these imply an 12% annualised return and a 40% total return by 2022 year-end.

Since then RMV shares have rebounded to 621.4p, exceeding our 2022 year-end price target, even after dividends were suspended.

H1 2020 results showed RMV’s resilience during the downturn, though it is too early to confirm the shape and speed of any recovery in the housing market.

H1 2020 Results Headlines

H1 2020 results were distorted by the 75% discount that RMV has given to all customers during April to July. However, the key is RMV remains profitable.

H1 revenues fell 34.1% year-on-year, primarily due to the customer discounts in both Agency and New Homes, though there was £1.6m in “Other” revenues from the Nationwide mortgage partnership that began in September 2019. Costs fell 2%, due to lower staff costs (with a third of staff furloughed from April) and lower travel & entertainment costs, offset by acquisitions and continuing R&D. EBIT and EPS fell by more than 40% but remained positive:

RMV will be continuing customer discounts at a lower level for a period, with a 60% discount for August and a 40% discount for September for customers in England, and 75% and 60% respectively for customers in Scotland and Wales.

Management has estimated the impact of the discounts on H2 revenues to be £35-37m (approx. 25% of H2 2019 revenues); the full-year impact of discounts is now expected to be £83-92m (from £65-75m previously). These imply a 2020 revenue figure close to our forecast of £202.5m.

Total costs are expected to be flat year-on-year for 2020, also in line with our forecasts.

Relatively Limited Customer Losses

Helped by the discounts, RMV’s customer losses have been relatively small. Since 2019 year-end it has lost about 3.3% of its customers (or 651, including 580 estate agents). RMV customer number was also down in 2019 and flat-ish in 2018, and the number of agents has been declining since H2 2017:

Rightmove Customer Growth Y/Y & Customer No. by Type

NB. H1 2020 growth rate is calculated from 2019 year-end.

Source: RMV company filings.

Management has stated that most of customer losses are in smaller, lower-value agents, who have struggled in the difficult U.K. housing market.

There are some signs of recovery in RMV customer numbers. In the Agency segment, RMV’s losses in branch-based agents were highest in April, and turned into a small positive net add in May and June; its customer numbers in hybrid agents are “virtual” (based on their stock levels) and have been mostly flat year-on-year after a large decline in January:

In the New Homes segment, management stated there was “a strong return of discretionary product spend in May and June”.

Still Dominant Market Position

RMV retains a dominant #1 position among U.K. property portals. It has kept a near 90% share of the time that U.K. consumers spend on property portals, broadly stable from 2018 excluding a methodology change in March 2019:

Share of Consumer Time Spent by Platform (Since 2018)

NB. Data is based on comScore (time spent on all platforms).

Source: RMV results presentation (H1 2020).

RMV believes its lead in the market has widened, as “the only place to see more or less the whole of the U.K. property market in one place”, with more than 50% more property listings than any other competitor.

U.K. Housing Market Remains Weak

The U.K. housing market remains weak, though there are some signs of recovery, for example with the amount of time consumers spend on RMV’s website having recovered sharply since late March:

Consumer Time Spent on Rightmove (Since February)

Source: RMV results presentation (H1 2020).

However, the volume of year-to-date sales agreed (which drives estate agents’ income) started falling behind 2019 levels in March, and was still approx. 20% lower year-on-year as of late July; the level of available stock also remained consistently lower though heading in the right direction:

U.K. Housing Market Sales Agreed & Stock (Since February)

Source: RMV results presentation (H1 2020).

Similarly, the volume of New Homes development has been a fraction of its prior-year level since April, as construction was affected by the lockdown:

U.K. New Homes Listing & Sold Rates (H1 2020)

Source: RMV results presentation (H1 2020).

Both the duration of the COVID-19 outbreak and its effect on the U.K. housing market remain unclear – on the one hand it is certainly bad for the economy; on the other hand it may actually encourage more people to move house.

We expect estate agents to remain under pressure, and the number of RMV customers to decline in both 2020 and 2021, with 2021 year-end numbers to be lower than 2019 by a low-single-digit percent.

Post-COVID Growth Potential

Over the longer term, we continue to believe RMV will resume a high-single-digit annual growth rate in both revenue and earnings after COVID-19.

Notwithstanding the slowing growth in customer numbers as it reaches maximum penetration, RMV has continued to grow revenues each year, though with growth being more dependent on Average Revenue Per Agent (“ARPA”):

RMV Revenue Growth by Component (2011-2019A)

NB. Includes some estimates. Source: RMV company filings.

APRA growth has historically been driven by both price and mix (management stated the split was roughly 50/50), with this trend continuing even in H1 2020, albeit with some impact by COVID-19:

  • For price, management claimed to have “two thirds of our planned price rise activity having been completed prior to lockdown”
  • For mix, the number of agents taking premium packages is slightly down from 2019 year-end, but the mix has shifted further towards the high end

RMV No of. Premium Packages for Agents

NB. Package pricing is Optimiser 2020 > Optimiser 2015 > Enhanced.

Source: RMV results presentation (H1 2020).

RMV does have some newer revenue lines, for example in tenant referencing (with the Van Mildert acquisition) and in the Nationwide mortgage collaboration, but these remain in their early days.

We therefore expect RMV’s ARPA in 2021 to be only a high-single-digit percent higher than that in 2019, a slower rate of growth than usual. Combined with the low-single-digit percent decline in customer numbers described above, we expect 2021 revenues to be 5% lower than 2019.

Thereafter we expect RMV’s revenue to grow at a high-single-digit annual rate, from the same in ARPA growth and a flat customer number, and RMV’s EBIT to grow at the same rate, with underlying EBIT margin remaining flat at 76% (as it roughly did through 2017-19).

Valuation

At 621.4p, on 2019 financials, RMV shares are trading at a 31.4x P/E and a 3.3% Free Cash Flow (“FCF”) Yield:

RMV Earnings, Cashflows & Valuation (Since 2015)

Source: RMV company filings.

Dividends and buybacks have been suspended, but management reiterated RMV’s “long-term policy of returning all Free Cash Flow” at H1 2020 results.

Had the final dividend not been cancelled, 2019’s total dividend would have been 7.2p (up 11% year-on-year), implying a 1.2% yield. RMV also bought back £88.6m of shares (1.6% of outstanding shares) in 2019.

Cash was at £50.3m at H1 2020 (no debt), and management stated its intent to keep RMV’s cash balance at £50m, implying that all future cash generated would be available for distribution to shareholders.

Illustrative Forecasts

Our updated illustrative forecasts for RMV are below – we now assume a much faster recovery in revenues and earnings, including:

  • 2020 P&L to remain mostly unchanged from our previous forecasts, as they are in line with the latest management outlook
  • 2021 revenues to be 5% above 2019 level; EBIT margin is to be at 76.0%
  • Thereafter revenues and earnings to grow in line with each other at 9%
  • Dividends to at the original 2019 declared level of 7.2p in 2021, then to grow with a 35% payout ratio; the rest of EPS to be spent on buybacks
  • The P/E multiple to de-rate slightly from the current 31.4x to to 30x by 2023 year-end, giving an exit price of 766.8p:

RMV Illustrative P&L Projections (2018A-2023E)

Source: RMV company filings; Librarian Capital estimates.

Compared to the current share price of 621.4p, these forecasts imply a 7.8% annualised return and a 24% total return over the next 3.3 years:

Illustrative RMV Returns

Source: Librarian Capital estimates.

Conclusion

Rightmove’s shares have rebounded 41.2% since we upgraded our rating to Buy in March, exceeding even our 2022 year-end price target.

H1 results were distorted by a 75% discount to all customers since April, but Rightmove remains profitable and will clearly survive the downturn.

Rightmove remains the dominant U.K. property portal; customer numbers and the number of premium packages have only declined slightly.

We expect Rightmove earnings to be 5% higher than 2019 levels by 2021, and to grow at 9% annually thereafter.

At 624.1p, shares are likely to deliver a 7.8% annualised return by 2023 year-end, below our requirement; we downgrade our rating to Neutral.

Note: A track record of my past recommendations can be found here.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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