Long-range targets should be viewed with a hint of scepticism even in easy trading conditions. The property advertising titan Rightmove has set out plans to accelerate sales and profit, just as the competitive stakes have shifted.
Rightmove’s market update is well-timed, even if it does insist that plans were well under way before the emergence of a deal between one of its rivals and a deep-pocketed US property group. The takeover of the number three player, OnTheMarket, by CoStar just five weeks ago wiped more than a tenth off the FTSE 100 constituent’s market value.
In only his second update as Rightmove boss, Johan Svanström has unveiled plans to produce annual revenue of more than £600 million and underlying operating profits north of £420 million by 2028. That translates to compound annual growth of 10 per cent and 9 per cent, respectively, over the next six years. That is also double the annual rate of growth turned out over the past six years.
Svanström is looking to new end markets to fill the gap. One is the mortgage industry, by offering its existing estate agent clients the opportunity to also market their mortgage broking services via the Rightmove website. Rightmove gets a fee per lead they pass on and a slice of the estate agent’s commission. The service launched less than a week ago. Rightmove thinks it can grow to a revenue stream of £25 million a year by 2028.
Then there is the commercial real estate market. Marketing on behalf of landlords and developers is a service that has been offered for the past decade, but poorly executed. Sentiment among retail and office owners is hardly buoyant. But Rightmove expects £35 million in sales by 2028.
Funding its push into new areas means the operating margin will fall to 70 per cent, from 73 per cent, next year and in 2025. Still enviable by most corporate standards, yet analysts at Shore Capital reduced pre-tax profit forecasts for the next two years by around 3 per cent, resting at £299 million in 2025. It would then need to accelerate its profit growth in the outer three years to hit its 2028 targets.
The online property portal’s revenue stream is not directly linked to the volume of listings on its site, nor to house prices, but it is reliant upon the health of estate agents and the housing market. Revenue growth depends on increasing membership among estate agents and housing developers looking to market their properties, alongside upselling additional and more expensive services to those advertisers.
Looking beyond its core residential market for growth is sensible. The muscle it has in the online property advertising market makes gains inevitably harder to come by, but the pay-off is hardly a given.
Strength in that strategy has been mixed. This week, the group raised guidance for the average revenue it expects to generate from each user this year to between £112 and £116, from £103 to £105, as developers of new homes have proven more successful than to estate agents. Revenue is expected to rise by between 8 and 10 per cent. Yet membership growth has been anaemic in recent years, up just 1 per cent in the first half, and was flat last year.
Investors have already discounted the shares to reflect more challenged growth prospects. The shares trade at 20 times forward earnings, close to the bottom of the long-running range.
The premium rating has historically been well founded. Scale has worked to its advantage, with estate agents willing to stump up for guaranteed views of properties on the portal, which has helped it retain a dominant market position. Likewise, the business is capital-light, which means it throws off lots of cash.
The question is whether CoStar uses its latest investment to turn the competitive screws on Rightmove. If so, Rightmove could be forced to spend more on holding its market share, which stands at more than 85 per cent of the online property advertising market. CoStar is seven times bigger than Rightmove and plans to invest more than £46 million in marketing its recent purchase this year alone.
Investors should not take it as a given that long-term targets will materialise.
Advice: Avoid
Why: Hitting long-term sales and profit targets could prove a stretch
Pets at home
Major investment projects are accompanied by banana skins. Pets at Home has slipped up in overhauling its distribution facilities, combining three warehouses into one.
At peak disruption, product availability fell to about 80 per cent, from a norm of 95 per cent. The issues are now fixed, said Lyssa McGowan, Pets at Home boss. Yet the retailer will incur an extra £14 million in logistics costs this year. And the rate of sales growth for the core retail business was half of what it would have been during the second quarter, the group estimated.
Guidance for adjusted pre-tax profit was held at £136 million for this year, which is also above the £123 million recorded last year. Management reckons it can make up the shortfall during the second half of the year, by paying less than expected on IT projects, cheaper energy costs and more reliable sales in its vets business.
The retailer is in the second year of a five-year investment plan to open and overhaul more of its shops and improve its website and data analytics, at an aggregate cost of £400 million. Last year was the peak, at £75 million, this year spending should come in at £60 million.
A period of heightened spending and a comedown in sales growth post-pandemic has already been reflected in the retailer’s valuation. The shares trade at 13 times forward earnings, at the lower-end of the long-running historic range.
The group is aiming to grow underlying pre-tax profits at a compound annual rate of 10 per cent over the next five years. Hitting that will depend on spending getting back on track and how sales fare now pet owners are less flush with cash. Gross margins for the retail business compressed to 45 per cent during the first half of the year, from 46.7 per cent, as sales of higher margin accessories declined 3 per cent and food sales rose 10 per cent.
Sales at its veterinary practices remain more resilient. However, the investigation opened by the Competition and Markets Authority in September into pricing and in the veterinary services market remains a risk. A crackdown would also raise questions over how achievable Pets’ 7 per cent group sales target is. McGowan reckons the investigation will have no impact on the retailer’s ability to hit its financial targets. The jury is out.
Advice: Avoid
Why: Margins could come under more pressure
