March marked the seventh straight monthly fall in house prices and the worst decline since the financial crisis. It comes as the rapid rise in mortgage rates is testing Rightmove’s impregnability for the first time in more than a decade.
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. Both will prove more challenging this year.
Market dominance is Rightmove’s greatest asset, but achieving a near monopoly has come with a creeping downside — flatlining membership. At the end of last year, the number of estate agency branches and developers on the advertising platform stood at 19,014, a whisker above the 18,969 at the end of 2021, as it has become harder for new branches to establish themselves.
Developer numbers have seen the biggest decline, down from 3,462 in 2019 to 3,082. True, the number of housebuilders advertising on the platform actually increased last year, even amid the chaotic fallout from the mini-budget in September. But with major players like Persimmon, Bellway and Taylor Wimpey cutting guidance for completions this year in the face of weaker demand, it would be fair to assume that some smaller developers might pull out altogether.
It means that Rightmove is betting on upselling and annual price increases of its advertising packages to keep pushing the top line forward. Average revenue per estate agency and developer grew by 11 per cent last year to £1,278 and £1,513 respectively. That has given management “increased confidence” it can maintain its record this year.
Convincing estate agents to upgrade their subscription packages and increasing the prices charged to advertise on the website is an easier ask when those firms are flush with cash. That might become harder if estate agents and developers more heavily scrutinise their marketing budgets in the face of a downturn.
Investors have already discounted the shares to reflect more challenged growth prospects. The shares have fallen by around 30 per cent since the start of last year, but that should not be taken as a green light. The current price/earnings growth ratio of 3.5 is higher than all of the seven years before the pandemic. For context, any ratio below one typically indicates good value.
The market could be too optimistic on the amount of cash Rightmove can continue to squeeze out of advertisers. The current share price implies average revenue generated from each of its members increases at a rate of between 8 per cent and 10 per cent a year “into perpetuity”, according to calculations from Jefferies. The brokerage forecasts growth of about 2 per cent this year.
The next question is whether Johan Svanström, the new boss, will step up investment in improving the platform — something Jefferies’ analysts think would suppress the margin in the short term but is necessary to maintain competitive advantage. Rightmove has guided towards a margin of 73 per cent this year, in line with last year.
Rightmove’s premium rating has historically been well grounded. 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.
Amassing advertisers at low incremental cost has given the group enviable operating margins of more than 70 per cent. Likewise, the business is capital-light, which means it throws off lots of cash, generating the equivalent of 101 per cent of operating profit last year. After paying taxes, finance costs and dividends, net cash stood at £35 million at the end of last year.
At the current share price, it looks as though investors are too focused on the historic positives than the challenges to earnings ahead.
ADVICE Avoid
WHY Share price seems to factor in too much earnings growth despite market challenges
Wizz Air
Throughout the turbulence caused by the pandemic, Wizz Air has been an outlier among its London-listed peers. Pursuing an ambitious expansion strategy across Europe and, more recently, the Middle East had afforded it a premium valuation from investors.
Failure to fill that expanded capacity as fast as expected has caused investors to question whether a generous market rating had become too generous. Wizz Air’s expansion plans complicate its ability to fully benefit from the sharp recovery in air travel. The rebound in demand has been amplified by the slower return of capacity, which has pushed up fares.
On that score, Wizz Air is no different. The airline’s load factor — the percentage of available seating capacity filled with passengers — rose to 92.2 per cent in March, just shy of the 94.1 per cent in the same month in 2019. Average fares over the first nine months of the year were ahead of pre-pandemic levels.
Yet the Budapest-based airline expects to record a net loss this financial year, in contrast to IAG, which swung back into profit last year, and easyJet. Analysts at Barclays have forecast a net loss of €534 million for Wizz this financial year, albeit an improvement on the €647 million loss suffered last year, based on a load factor of 88 per cent and a 20 per cent rise in average fares across the fourth quarter.
A failure to hedge against soaring jet fuel prices until more recently had caused Wizz Air to come unstuck. At the end of December it had hedged 59 per cent of planned consumption for this year and 45 per cent for the next. With oil rising, there could be the chance for the airline to lock in lower fuel prices.
Greater uncertainty rests on its ability to execute on expanding capacity in western European airports, where it faces competition from Irish cut-price airline Ryanair, a dominant player that is also in growth mode.
Wizz has attributes that helped it through the pandemic: a bias towards short-haul routes and a lower degree of leverage. The latter is its greatest relative attribute. But there are cleaner and cheaper ways to play the recovery in aviation.
ADVICE Avoid
WHY Expansion plans carry execution risk that is not reflected in the share price
