RTMVF - Rightmove: A Good Play On The U.K. Housing Market

2023-10-27 03:35:21 ET

Summary

• Rightmove plc is a British online property portal serving buyers, sellers, renters, and landlords.
• It is one of the 20 holdings of the publicly shared Moats and Monopolies portfolio.
• Rightmove plc is considered a great investment opportunity for its strong presence in the UK housing market.
• It is a market leader with wonderful margins and converts nearly half of its revenue into free cash flow.
• Despite potential competition, Rightmove is set up to be successful for many years to come.

Moats and Monopolies

Here at Moats and Monopolies, we run a concentrated portfolio of high quality compounding assets from across the world. This is shared publicly and openly on Seeking Alpha. Rightmove plc (RTMVF) is one of our 20 holdings, and we would like to discuss why you should consider it as a great play on the UK housing market.

Introduction and Business Model

Rightmove plc is a British company that serves as an online portal for buyers, sellers, renters and landlords. It currently lists nearly 3/4 of a million properties and makes the majority of its revenue in the UK. It operates a brokerage business model where it charges its customers, letting and real estate agents, to advertise the properties of their clients on its portal. The company currently has around 19,000 registered members with a monthly average revenue per advertiser (ARPA) of £1411 or around $1700. It is not the only game in town, but has a market leading position and is ubiquitous in the UK. With home seeking eyeballs spending 16 billion minutes looking on the site last year, there is pressure for agents to have their clients' properties listed on the platform to support their attempts to get the best possible price and thus the highest possible commission.

Strong Foundations

As Rightmove dominates its niche, it has been able to consistently raise its ARPA over time by regularly increasing listing fees to agents that use its platform. As Rightmove operates a capital light business (the capex has stayed flat over the past decade), it is able to generate incredible margins of around 45% of revenue becoming free cash flow. It could even be the most profitable property portal in the world .

Stock based compensation is low at around 3% of its free cash flow, leaving us investors with a genuine cash cow that routinely increases its dividend (around a 10.8% 10 year CAGR) and buys back its stock (around 2% of shares outstanding each year over the past decade). Further, over the past 10 years it has never held a net debt position on its balance sheet.

Macro Risks

The UK, like many other Western countries over the past year, has been feeling the effects of a rise in inflation, and has one of the highest current rates in the developed world. This has led to the Bank of England following many other central banks in aggressively raising interest rates . This has inevitably forced mortgage rates up quickly and they have now surpassed post 2008 financial crisis levels. All of this at a time when the UK has been dealing with the financial aftermath of Brexit (an estimated 2-3% of GDP ) and the COVID-19 pandemic.

All of this has a potential impact on Rightmove's core business. Higher mortgage rates reduce the ability of new home owners to take on the credit they would need and existing homeowners to renew/remortgage their homes. This leads to falling home prices , perhaps as much as 10%, as demand wanes. Fewer homes being sold = fewer listings = less demand for property portals, such as Rightmove. It may well be that this will be seen in the next few quarters of the company's results and could keep the stock flat or even down in the near term.

Competition Risks

As aforementioned, Rightmove is one of several property portals in the UK, so it has always had some competition; however, the company's stock sold off over 10% overnight last week with news of the 3rd largest property portal, OnTheMarket, being acquired by CoStar in an attempt to increase its market share and potentially dislodge Rightmove as the number 1 property portal in the UK. In our view, this was an overreaction that we capitalised on by purchasing more Rightmove stock.

Many properties are already advertised on several platforms as agents attempt to generate leads and ideally pit them against each other to get the most attractive sales price and therefore commission. It is in the interest of agents to have properties, particularly lucrative ones in large metropolitan areas such as London or larger homes in attractive rural areas, advertised in as many places as possible. Even if there is traction with OnTheMarket with more agents listing their properties on it, these decisions are not mutually exclusive. Potentially listing with two (or more) portals that attract 'billions of minutes' of attention, can only serve to improve the price for clients and increase sales commissions for agents, a value proposition that is accretive to everyone involved. Competition is rarely seen as positive, but in this case, having seen properties in England with countless signs in the garden, listed on various sites, it seems unlikely that Rightmove won't continue to be paid.

Summary and Chance of Beating the Market

The matrix below allows one to make their own forecasted annual returns over the next 10 years. For a frame of reference:

Current TTM PE: 19

5 year average: 33

10 year EPS CAGR: 13.89%

10 year dividend CAGR: 10.82%

Red = 8% or less CAGR from the current share price

Orange = between 8% and 12% from current share price

Green = 12% or more from current share price

We believe that there will be a slowdown in the UK housing market over the next few years that will slowly normalise as interest rates start to ameliorate higher inflation. As a result, we believe that the EPS growth will slow down from its past decade performance to normalise around 10% CAGR, fuelled in part by a more efficient buyback program as the company's stock price is trading at the cheapest levels it has in the past decade.

Its high margins and steady growth we expect will continue and as a result its market multiple will trade above the market, as it should for a company of this quality. We do see this reducing slightly to 18, and although this may be too conservative, it increases our margin of safety.

The below forecast assumes that dividend growth stays in line with EPS growth at 10% CAGR. Based on which, we believe the company will deliver a 10% per year return over the next 10 years. This should be at least in line with the market and a quicker than expected bounce back in the UK housing market or a higher than anticipated market multiple on the company's earnings could see further Alpha from our forecast.

Our assumptions:

10 year future EPS CAGR: 10%

PE in 2033: 18

Dividends are not reinvested

Final Words

In Rightmove, we have the opportunity of investing in a company with a strong market position with a product that is essential for real estate agents in order to extract the best possible value from home sales. Its dominance has led to world-class margins and the company is a cash cow - buying back its stock and rewarding patient investors with an increasing dividend. It does face some competition risk, albeit it already does and it hasn't affected its business performance; however, there are definite near term headwinds in the UK housing market from inflation and interest rates that may keep the stock flat or even down over the next few quarters. We see this as an opportunity to get in at the cheapest valuation in a decade.

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