The United Kingdom is a former superpower and has the sixth-largest economy in the world. It generated solid 4% gross domestic product growth in 2022 and is now forecast to narrowly miss a recession in 2023 with 0.2% growth reported, up from the -0.7% expected previously.
Inflation in the U.K. has been sticky, but did fall to 8.7% in April. This compares to 11.1% in October 2022. KPMG forecasts a 6.3% inflation rate by the end of 2023 and a rebalancing below the central banks target by 2024. In the meantime, the Bank of England hiked interest rates for the twelfth time to 4.5%, which has had a number of effects on the economy, namely the housing market.
In this discussion, I will break down the market-leading U.K. housing platform and reveal my valuation for the stock. Let’s dive in.
What does Rightmove do?
Rightmove PLC (LSE:RMV, Financial) offers the most popular online housing portal in the U.K. The company is similar to Zillow (ZG, Financial) in the U.S. as it connects property agents with consumers looking to buy or rent.
The business also offers commercial property on its website and even overseas properties for those wishing to purchase a holiday home or relocate.
Rightmove generates its revenue by charging agents to list and promote properties on its website. Agents pay to get exposure to people actively searching for a property or “leads.”
If I compare Rightmove to Zillow in the U.S., I would say each can learn from the other. Rightmove has not made any major mistakes, unlike Zillow’s ibuying process, which was eventually wound down. However, in general, I would say Zillow is much more innovative and rapidly introducing new features.
Solid financials
In March, Rightmove announced its financial results for fiscal 2022. Revenue of 332.6 million pounds ($418 million) grew 9% year over year.
This was an amazing achievement given the high interest rate environment, which has caused a slowdown in the housing market due to higher mortgage costs. A study by Cebr forecasts U.K. mortgage costs to be a staggering 5.1% in 2023 and 4.6% in 2024.
The only consolation is a cyclical pullback, as central banks from around the world tackle inflation. Therefore, I would expect Rightmove to generate even stronger growth long term.
In 2021, the company reported a 48% year-over-year growth rate. Of course, this was partially driven by the reopening of the economy and a rebound in housing prices as a result.
Its full-year 2022 revenue growth was driven by a greater number of package upgrades by realtors as agency revenue rose by 247.3 million pounds, up 10% year over year.
Its average revenue per agent also rose by a solid 11% to 1,115 pounds, while its total agency customers dipped slightly (by 1%) to 15,932. This was not too bad given the tough housing market. However, this is an interesting metric to watch in order to determinecompetition dynamics.
New homes continued to be developed in the U.K and are less impacted by short-term cyclical pullbacks in the market. In 2022, new home revenue rose by 5% to 52.6 million pounds. A study by the NHF indicates the U.K still has a housing shortage with 243,000 new homes supplied in 2020-21. This was below the 340,000 required, of which at least 145,000 should be affordable.
There is also a north-south divide in the U.K. In the south (London area), the average house price is a staggering 523,000 pounds. However, in the north of England, this figure is much lower. The average house price in Manchester is around 304,000 pounds, while in far north cities such as Newcastle the average price is closer to 214,000 pounds.
Rightmove’s alternative revenue sources have also been growing well with 32.7 million pounds reported in 2022, up 8% year over year. This was driven by rapid growth in Commercial property (up 19% year over year) to 1.7 million oiybds and Overseas property up 21% year over year to 1.1 million pounds. This is strong growth but still small numbers on a relative basis, so I would like to see continued growth at the prior rate at least.
Moving onto profitability, Rightmove reported earnings per share of 23.4 pence in 2022, which was up 10% year over year.
This was boosted by its share buyback program, which reduced the number of shares available from 858.8 million to 835.3 million.
Operating expenses did rise by 12% year over year to 91.3 million pounds. However, this was partially offset by 7 million pounds in higher payroll costs due to increased headcount. This was surprising given many companies are reducing headcount in the current environment.
The company has also been looking after its existing employees as well offering them a 1,000-pound cost of living payment, in addition to a 7% salary increase.
Moving onto its balance sheet, Rightmove reported 40.1 million pounds in cash and short-term investments and minimal debt of 11.6 million pounds.
Advanced valuation
In order to value Rightmove, I have plugged its latest financial data into my discounted cash flow valuation model.
I have forecast just 5% revenue growth for the next four quarters due to the headwinds facing the U.K. housing market.
In years two to five, I have forecast 10% revenue growth per year, which is fairly conservative and close to the 9% rate achieved in 2022.
I have kept my operating margin forecast close to the same 72.5% to 73% range achieved in 2022. This is an incredible margin and seems unrealistic as it is so good.
Rightmove generated just 332.6 million pounds in revenue for 2022, but the vast majority of this 241.3 million pounds was profit.
The beauty of its business model is it is very scalable and has a huge amount of potential should management become more innovative.
Given this data and my forecasts, I get a fair value of 5.92 pounds per share. Thus the stock is approximately 11% undervalued.
Its price-earnings ratio of 22 is fairly high for the U.K market, given the FTSE 100 Index has an average earnings multiple of 14. However, Rightmove’s market position is undisputed and its margins are exceptional.
The business also trades with a price-sales ratio of 13.32, which is 24% cheaper than its five-year average.
Final thoughts
Rightmove has a leadership position in the market thanks to its strong brand. It is the go-to place for U.K. home buyers and renters to search for properties. Therefore, this makes it an ideal place for agents andrealtors to gain exposure.
I believe the headwinds in the housing market could cause the stock to drop further. However, given Rightmove is undervalued intrinsically, this could be an ideal stock to average down into. As inflation is expected to continue falling, I expect interest rates to be lowered eventually and the housing market to rebound.
