|Shares Out. (in M):||0||P/E|
|Market Cap (in $M):||320||P/FCF|
|Net Debt (in $M):||0||EBIT||0||0|
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Summary & Background
Rightmove is the leading online real estate portal in the
§ Defensible, cash generative business model, which benefits from ongoing shift in advertising spend from newspapers to online advertising, while not directly impacted by the volume of real estate transactions
§ Substantial pricing power—since it first started charging for services in 2003, the Company raised prices every single year for 4 consecutive years
§ Cash rich balance sheet, with some of the cash returned to investors through dividends and share buybacks
§ Attractive valuation—currently trades at 7.5x 2008E EBITA and 11x 2008E earnings per share
Unlike US and
As of January, 2008 the Company offered the following pricing structure:
· Estate agents
The company charges £250/office/month plus £50 if also displaying rental properties.
For new estate agents or customers who have joined since July 2007, Rightmove charges £325/office/month plus £75 if also displaying rental properties.
· New home developments
The company charges £290/development/month for up to four developments, with various discounts down to £230/development/month if advertising more than 200 developments. For new developers or those who have joined since July 2007, Rightmove charges £450/month/development for up to four developments, or £270/development/month for those advertising more than 200 developments.
· Overseas homes rental
The company charges £250/month for each overseas customer although this can be higher for agents advertising a large number of properties.
· Lettings-only agents
The company charges £125/rental office/month. For new rental agents or those who have joined Rightmove since July 2006, the company charges £150/office/month.
The above pricing structure translates into average ARPA (Average Revenue per Advertiser) of £259 per office per month, up from £192 in 2006 and £157 in 2005. The reason average ARPA may seem lower than above figures suggest is because older customers are locked into long term contracts with lower fees.
The stock is down from £5.00 in April to £2.90 currently primarily on concerns over the
What about other sites? RMV, with more than 1 million homes listed for sale or rent, is the market leader, followed by Findaproperty.com and Primelocation.com with more than 400,000 each, Propertyfinder.com with 280,000 and a long tail of smaller sites. A look at number of listings alone is somewhat misleading -- if market share is measured by clicks that generate inquiries (which is what estate agents really care about) Rightmove has 79%, Primelocation—10%, Findaproperty—6% and Propertyfinder—5%. Due diligence calls confirmed that estate agencies advertised on multiple sites when “times were good” in order to enhance their brand recognition but this is unlikely to continue in a tough market when they watch every penny. In fact, some of the competitors started price cutting already in order to entice agents to keep the listings with them. Rightmove, on the other hand, did not feel the need to do that. It may not raise prices outright in 2009 but experiment with bundling products instead to give customers more perceived “value”. Last year the Company introduced its Choice product range—essentially a tool for agents to brand themselves on the site. Now when estate agent spends £200 per month on Choice products, they get add’l £200 worth of advertising for free as well as a guaranteed price freeze for the next 12 months. Of course, by encouraging an agent to purchase £200 worth of Choice the Company just raised this customer’s ARPA from £325 to £525 per month with very little incremental cost.
Management believes that in 5 years online will represent 50% of the total spend of £600 m and the Company will capture 80% of that, which translates into £240 m annual revenue opportunity. Assuming RMV has 20,000 subs by then (up from est. 18,000 in 2008 which accounts for estate agents and developers going out of business discussed above) it means that average subscriber should spend £1,000 per month with the Company. This may be aggressive but is not needed to generate a respectable return—my forecast assumes RMV reaches annual revenue of £105 m in 2012 with average ARPA per sub per month of £427. So even if total advertising pie shrinks to £400 m, RMV share would only be slightly more than 25% of the total, which I regard as fairly conservative.
Financial Metrics / Valuation / Target Price
At £2.90 per share, and 111.2 m shares outstanding (after recent buybacks) market cap is £323 m, which equals TEV as well since modest net cash amount of £12 m was spent on recent share buybacks. This represents 8.1x 2008E EBITA of £43.6 m and 11.2x estimated 2008 EPS of £0.25. With projected dividend of £0.12 per share in 2009, the stock offers 4% dividend yield.
Expect total revenues to grow at 10% CAGR over the next 5 years and reach £105 m in 2012 (driven by increase in ARPA and very modest penetration growth) and operating margins to expand by 200 bps from 60.0% in 2008 to 62% in 2012 due to effect of scale and operating leverage. Since the business is essentially working capital neutral and requires only a modest capital investment (estimated to be £10.5 m over the next 5 years) this should translate into free cash generation of £170 m between 2008 and 2012. Substantially all of it should be returned to shareholders in the form of dividends and share buybacks (management indicated it will utilize additional £40 m credit facility to fund buybacks).
Target price is £5.60 per share represents 12.5x estimated 2012 earnings of £0.44 per share plus £0.10 per share in excess cash. This results in an IRR of 22% over 5 years or cash-on-cash return of 130% (from exit price of £5.60 and dividend stream of about £1.07 per share over the next 5 years)
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