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Rightmove: 10%+ EPS Growth, But Only After 2023

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Introduction

Rightmove PLC (OTCPK:RTMVY) (OTCPK:RTMVF) released 2022 results connected Friday (March 3). Shares fell 1% connected nan time but rebounded 2% connected Monday, though they are still down 12% successful nan past twelvemonth and astir 30% beneath their December 2021 peak:

Rightmove Share Price (Last 1 Year)

Rightmove Share Price (Last 1 Year)

Source: Google Finance (06-Mar-22).

We upgraded our standing connected Rightmove to Buy successful October 2021. Since past shares person mislaid 14% (after dividends). (Our Buy ratings during parts of 2019 and 2020 were much successful, generating gains of 30% and 41%, respectively.)

2022 results showed nan underlying spot of Rightmove's business, pinch an 10% EPS maturation driven by Average Revenue Per Agent ("ARPA") maturation and buybacks. However, 2023 outlook implies a level EPS, owed to a little ARPA growth, costs increases and a higher taxation rate. 10%+ EPS maturation will apt resume successful 2024, helped by maturation in Other Revenues and mini improvements successful EBIT margin. There tin beryllium further upside if U.K lodging transaction measurement starts increasing again. Rightmove shares presently person a 24.5x P/E and a 1.5% Dividend Yield. Our forecasts bespeak a full return of 44% (14.1% annualized) by 2025 year-end. Buy.

Rightmove Buy Case Recap

Rightmove is nan #1 residential spot listings website successful nan U.K. Its revenues dwell chiefly of subscription fees from property agents (74% of 2022 revenues) and developers (16%), pinch different fees based connected package tiers, products purchased, nan number of branches and volumes. The institution is besides generating expanding amounts of revenues (10% of 2022 revenues) from different products, including commercialized existent estate, information services and mortgages.

We judge Rightmove will clasp its power successful U.K. residential spot listings, helped by nan web effect connected its level and nan value of its merchandise features. The institution has continued to heighten its value-add to customers by adding caller features and by expanding into adjacencies specified arsenic tenant referencing and landlord insurance.

In our past article successful July 2022, we had forecasted an 11% EPS CAGR from 2022 onwards, based on:

  • Revenues increasing astatine high-single-digit annually, driven by continuing Average Revenue Per Agent ("ARPA") maturation from some value increases and customer upgrades, arsenic good arsenic a mini maturation successful nan number of customers
  • EBIT separator recovering to 75% and past remaining unchangeable thereafter, fixed Rightmove is simply a level business pinch debased incremental portion costs and earthy operational leverage
  • Management to proceed to return each net to shareholders successful dividends and buybacks
  • Shares to waste and acquisition astatine a P/E aggregate of 30x astatine exit

Rightmove's 2022 results and outlook support our wide net maturation expectations, but pinch a different equilibrium of publication betwixt revenues and EBIT margin, and pinch 2023 apt to correspond a region successful EPS growth.

Rightmove 2022 Results Headlines

2022 results showed nan underlying spot of Rightmove's business, pinch EPS maturation increasing 9.8% year-on-year:

Rightmove Profit & Loss (2019-22)

Rightmove Profit & Loss (2019-22)

Source: Rightmove results releases.

NB. 2019 dividend excludes a 3.2p last dividend that was declared but not paid.

Agency & New Homes revenues grew 9.2% year-on-year successful aggregate, pinch a flattish (up 0.2%) full customer count and an ARPU maturation of 10.5%. Within nan customer count (measured astatine year-end), Agency customers fell 1.1% but New Homes customers grew 7.8%, reflecting a weaker lodging marketplace successful H2 (following complaint rises and macro uncertainty successful nan U.K.) that reduced caller agency statement but encouraged much advertizing by developers. Within nan £125 ARPA growth, complete 60% came from customers upgrading aliases buying much products, while nan remainder came from value increases.

Other Revenues grew 7.8% (£2.3m), pinch double-digit gross maturation successful Commercial, Data Services and different products offset by a £2.6m gross diminution successful Mortgages, nan second aft Rightmove changed its monetization exemplary location from a fixed trading interest to commissions astatine nan extremity of 2021.

Costs excluding Share-Based Compensation ("SBC"), aliases Underlying Costs successful guidance terminology, grew 14.3% successful 2022. Cost maturation was driven by some caller hires (headcount grew 12%) and by costs inflation, nan second besides including a £1,000 per-head cost-of-living allowance and a determination to bring guardant nan 2023 salary emergence to October 2022.

Reported EBIT grew 6.7%, aliases 7.9% excluding nan £2.4m prior-year summation related to nan write-off of a contingency costs related to nan Van Mildert acquisition. Underlying EBIT, which besides excludes SBC, grew 7.4%. Reported EBIT separator fell from 74.2% to 72.6%, while Underlying EBIT Margin fell from 75.0% to 73.8%.

Reported Net Income grew 6.9% and, pinch nan stock count having fallen 2.6% aft buybacks, Reported EPS grew 9.8%. Underlying EPS, which excludes some SBC and nan Van Mildert gain, grew 9.1%.

2022 EPS maturation was mostly driven by APRA maturation (10.5%) and buybacks (2.6%), pinch minimal publication from a flattish customer count, partially offset by a little EBIT margin.

Across nan 2019-22 period, which included a crisp simplification successful revenues successful 2020 from COVID-related customer discounts, Rightmove achieved CAGRs of 4.8% successful revenues, 4.1% successful EBIT and 6.2% successful EPS.

Rightmove 2023 Outlook

Management's 2023 outlook implies a level EPS, owed to a little ARPA growth, costs increases and a higher taxation rate:

  • Customer count to beryllium "broadly stable", pinch "a mini shift" from Agency to New Homes
  • APRA maturation successful nan mediate of nan erstwhile £95-105 range, i.e. 7.6% connected 2022 APRA of £1,314
  • Other Revenue maturation to beryllium "healthy"
  • Underlying EBIT separator of "around 73%", i.e. a mini diminution from 2022 (73.8%)
  • Tax complaint of 25%, compared to 17.9% successful 2022, successful statement pinch nan U.K. government's announced taxation hike

Revenue assumptions are based connected a comparatively anemic U.K. spot market, but pinch Rightmove's APRA maturation driven by "new merchandise launches, ongoing merchandise uptake and pricing actions". Cost assumptions see a 5% ostentation summation successful wages (compared to 3% successful 2022) and further investments, offset by nan absence of 2022 one-offs.

Applying these assumptions (and immoderate of our own) connote a 2023 Net Income that is astir 1.5% little year-on-year, and a 2023 EPS that is flattish aft buybacks.

10%+ EPS Growth from 2024

Rightmove's 10%+ EPS maturation will apt resume successful 2024, helped by maturation successful Other Revenues and mini improvements successful EBIT margin.

CFO Alison Dolan stated that Rightmove is expecting Other Revenues to "increase by astir £10m a year" aft 2023:

"Those businesses are truthful linked to nan halfway business. The incremental finance is mostly group and this intends that they are very high-margin businesses … So margins successful excess of nan halfway business are being delivered by some information services and commercialized existent estate. As a category, erstwhile we're retired of '23 … you should expect to spot that different statement summation by astir £10 cardinal a year, truthful already becoming already EBITDA accretive.

Each £10m successful incremental revenues is worthy astir 3% of gross maturation (based connected 2022).

Similarly, connected margin, she agreed pinch an expert mobility that nan 73% Underlying EBIT Margin guided for 2023 will apt correspond nan trough, though she besides rules retired aiming for a return to 75%:

We afloat intend to proceed to present margins successful excess of 70%. Having said that, returning to 75%, 76% is not an ambition that we peculiarly person either, arsenic we -- peculiarly arsenic we get down these strategical initiatives. So is it nan trough, astir apt broadly, but I'm talking wrong a 1%, 2% range."

Overall, compared to our original finance case, Rightmove now seems to beryllium guiding to a higher gross maturation (driven by Other Revenues) but a little highest EBIT separator complete nan mean term.

The operation of Rightmove's emblematic high-single-digit ARPA maturation (from some value and mix), a flattish customer count, different 3 ppt of maturation from Other Revenues and mini improvements successful EBIT separator will apt lead to a high-single-digit EBIT growth, which will successful move make a 10%+ EPS maturation including buybacks.

Upside if U.K. Real Estates Grow Again

There tin beryllium further upside if nan number of U.K lodging transactions resume increasing aft years of stagnation.

Rightmove has been experiencing a diminution successful its customer count since 2019, including a overmuch larger diminution during COVID-19, though APRA maturation has remained a reliable driver of gross growth:

Rightmove Revenue Growth by Component (2011-2022)

Rightmove Revenue Growth by Component (2011-2022)

Source: Rightmove institution filings.

Management commentary has attributed Agency customer declines to weakness crossed nan U.K. existent property industry. As outgoing CEO Peter Brooks-Johnson explained connected nan call:

The governmental and economical uncertainty pursuing nan Brexit ballot successful 2016 saw nan spot marketplace autumn for 4 consecutive years. In this sustained slower market, we saw Agency branches enactment unchangeable for nan first 2 years and past autumn by a full of 6% complete nan 2nd 2 years"

Data shows a multi-year diminution successful nan number of lodging transactions since 2016, only concisely interrupted successful 2021 pinch a post-COVID rebound arsenic good arsenic temporary reductions successful spot transaction taxes to support location buyers:

U.K. Housing Market Volume & Price (2007-22)

U.K. Housing Market Volume & Price (2007-22)

Source: Rightmove results position (2022).

NB. HMRC = His Majesty's Revenue & Excise; HPI = House Price Index.

Rightmove play income information showed that spot transaction volumes person fallen beneath their pre-COVID 2019 levels again since October 2022, though recovering since a trough successful December:

U.K. Weekly Residential Sales Agreed, Indexed to 2019 (Since Q4 2022)

U.K. Weakly Residential Sales Agreed, Indexed to 2019 (Since Q4 2022)

Source: Rightmove results position (2022).

If/when U.K. lodging transaction starts increasing again, nan number of U.K. existent property agents tin summation substantially, and Rightmove's gross maturation will apt bask an further impetus connected apical of nan accustomed ARPA growth, generating further upside successful nan stock.

Rightmove Stock Valuation

At 570.8p, Rightmove banal is trading astatine a 24.4x P/E and a 4.0% Free Cash Flow Yield:

Rightmove Earnings, Cashflows & Valuation (2019-22)

Rightmove Earnings, Cashflows & Valuation (2019-22)

Source: Rightmove institution filings.

Total dividends successful 2022 were 8.5p, representing a Dividend Yield of 1.5%. Management has a argumentation to return each net to shareholders, pinch astir 1 3rd to beryllium done successful dividends and 2 thirds successful buybacks.

Rightmove Return Forecasts

Actual 2022 EPS (23.4p) was astir successful statement pinch our forecast (23.5p).

We trim our assumptions connected Net Income, accrued them connected buybacks and trim our exit multiple. We now assume:

  • Net Income to beryllium level astatine £196m (was £218m)
  • Thereafter, Net Income to turn astatine 8% annually (was 9%)
  • Share count to autumn by 2% annually (was 1.5%)
  • Dividends to beryllium based connected a 35% Payout Ratio (unchanged)
  • 2025 year-end P/E of 27.5x (was 30.0x)

We are not explicitly modelling a downturn successful nan U.K., arsenic we judge nan antagonistic effect connected Rightmove net would apt beryllium quickly offset by stronger maturation successful consequent years.

Our caller 2025 EPS forecast is 9% little than earlier (31.9p):

Illustrative Rightmove Returns

Illustrative Rightmove Returns

Source: Librarian Capital estimates.

With shares astatine 570.8p, we expect a full return of 44% (14.1% annualized) by 2025 year-end.

Is Rightmove A Buy? Conclusion

We reiterate our Buy standing connected Rightmove PLC stock.

Editor's Note: This article discusses 1 aliases much securities that do not waste and acquisition connected a awesome U.S. exchange. Please beryllium alert of nan risks associated pinch these stocks.

This article was written by

Librarian Capital floor plan picture

Global, long-term, fundamentally-oriented & concentrated investing. With much than 10 years' buy-side experience, I look astatine stocks globally and crossed industries, pinch a attraction connected nan U.S. and U.K.. My investing style tin champion beryllium described arsenic "Quality Growth" aliases "Growth At a Reasonable Price". (previously penning nether nan sanction "Blue Sky Capital" until December 2019)

Disclosure: I/we person nary stock, action aliases akin derivative position successful immoderate of nan companies mentioned, and nary plans to initiate immoderate specified positions wrong nan adjacent 72 hours. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Editor: Naga



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