Peter Brooks-Johnson won’t be getting the easy exit he might have hoped for after 16 years as chief executive of Rightmove. The rise in mortgage rates after the chaos in the gilt market has exacerbated affordability pressures on existing and wannabe homeowners. House prices had already shown signs of weakening after reaching record levels on the back of the stamp duty break and a supply shortage.
For property portal Rightmove, which is reliant upon the health of estate agents and housing market, circumstances look ripe for its performance to disappoint market expectations. The consensus forecast for underlying profits this year stands at £246 million, which would be 6 per cent higher than the record achieved last year amid a booming housing market, and a further 8 per cent annual growth next year.
Investors are becoming sceptical. The shares have fallen just over 40 per cent since the start of this year, which equals the peak-to-trough fall during the March 2020 stock market crash. That leaves the shares more lowly valued in at least nine years, at just under 19 times forward earnings, a way below the shares’ long-running average forward earnings multiple of 27.
Yet if Rightmove fails to hit optimistic consensus expectations the shares will look less cheap. Recording earnings that are flat on last year would push that multiple up to 22 and if earnings fell back to 2019 levels, the company would be valued at an even less appealing forward earnings multiple of 24.
Rightmove has long been valued at a premium. Scale has been the group’s greatest asset, with estate agents willing to stump up for the guaranteed views of properties on the portal, which has retained a dominant market position. Amassing advertisers at low incremental cost has given the group enviable operating margins of more than 70 per cent. In a similar vein, a capital-light business model means cash generation is high, at just over £122 million in the first half, equivalent to 101 per cent of operating profits.
Rightmove’s revenue stream isn’t directly linked to the volume of listings on its site or house prices and it even has the ability to withstand a certain level of client attrition on the portal. Membership numbers stood at 18,934 at the end of June, 1,275 lower than at the same point in 2019, but during that time revenue has risen by 13 per cent to almost £163 million. In the past decade membership numbers have grown at a compound annual rate of only 0.2 per cent, while revenue has risen at a compound rate of 13 per cent.
How? By convincing estate agents to upgrade their subscription packages and increasing the prices charged to advertise on the website, an easier ask when estate agents are flush enough with cash. At the end of June, management thought that growth in average revenue per advertiser during the second half of this year would broadly “mirror” pre-pandemic growth levels, which came in at an annual rate of 8 per cent for 2019. Events of the past two weeks mean achieving that looks as if it will be a stretch.
House prices have started to fall, down for the second time in three months in September. Economists are forecasting a bigger fall in sale prices next year, with Capital Economics prediciting 6 per cent this year and almost 14 per cent next year. The rapid rise in mortgage rates since the government’s mini-budget has raised the possibility of forced sellers, which has greater potential to squash house prices than even a fall in transaction volumes.
A potential squeeze on estate agency coffers will hardly inspire sympathy but for Rightmove shareholders it is a major red flag.
ADVICE Avoid
WHY A fall in property prices could make it harder to increase revenue from advertisers
Synthomer
As post-pandemic comedowns go, Synthomer’s fall from grace has been more prolonged than most. The pain is set to last even longer than expected for the producer of materials used in disposable latex gloves as hospitals, workplaces and consumers run down stockpiles of personal protective equipment.
The impact of customers cutting PPE inventories is not expected to ease before the end of 2023, which means the performance elastomers division will post only “modest” profits this year. Group profits are expected to be between 10 and 15 per cent lower than expected, which implies a range of £280 million to £290 million, according to analysts at Jefferies, and a fall in profits of almost 50 per cent against last year.
Cue a share price collapse to levels not recorded since the immediate aftermath of the 2008 financial crisis. An enterprise value that represented 8.7 times forecast earnings before tax and other charges at the start of this year now stands at a multiple of 4.8.
Investors aren’t just pricing in lower earnings, but also the impact of efforts to strengthen a creaking balance sheet. At the end of June net debt stood at £993 million, or 2.3 times adjusted earnings before tax and other charges. By the end of this year, analysts at Numis expect net debt to have risen to £1.02 billion, which would equate to a leverage multiple of 3.5, hitting its banking covenant ceiling.
There are two clear ways of raising cash and deleveraging: an equity raise or asset disposals. Neither is ideal in the current environment. The first option? Given the heavy fall in the share price and level of debt reduction required, dilution of existing shareholders seems likely. The second? A fall in the pound might make businesses more attractive for overseas buyers, but a higher cost of financing is likely to also reduce the price secured by Synthomer in any asset sales.
Another delay in a return to growth for the nitrile butadiene rubber used in disposable gloves is one risk of the group missing even reduced profit expectations this year, a fall in demand for other chemicals used by industries such as construction is another.
ADVICE Avoid
WHY High debt levels and the risk of a further fall in sales could send the shares lower
