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Rightmove - new products and house builders boost growth

Emilie Stevens, Equity Analyst | 28 February 2020 | A A A
Rightmove - new products and house builders boost growth

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Rightmove plc Ord GBP 0.001

Sell: 621.00 | Buy: 621.60 | Change 17.60 (2.90%)
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Rightmove reported an 8% increase revenues for the year to £289m, with underlying operating profits rising by the same amount to reach £219.7m. That reflects strong growth in business with new home builders and continued uptake in Rightmove's higher priced subscription packages - offsetting a decline in the number of active estate agents.

The final dividend of 4.4p per share is 10% up on last year, taking the full year dividend to 7.2p.

The shares fell 3.3% on the news.

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Our view

Rightmove provides an online portal to connect buyers and sellers, and earns its revenue by charging fees to estate agents looking to access its audience of potential buyers.

The site is Googled more than "property" and as the number one destination for buyers, the group has long held the upper hand when negotiating time comes round. That's helped it increase the prices it charges. And since it's just managing a website, those higher prices drop straight through to profit. High margins and low capital requirements make for an attractive and cash generative business model.

All being well, there should be further to go on pricing. A decade or so ago, agents typically spent around £2,500 per office per month on print media. Rightmove's fees are currently a little under £1,100 a month. Historically, a slowdown in the housing market wouldn't have mattered to Rightmove, as it charges on a per office basis. The number of houses being bought or sold wouldn't have affected Rightmove collecting its fee - so long as estate agents weren't closing. But that looks to be changing.

Estate agents are struggling - digitally disrupted from various angles. Costs rising just as digital estate agents like Purplebricks steal customers by offering agency services at a fraction of the price. Rightmove's customer base is under threat and that's seen number of agencies signed up start to drop.

Rightmove is plugging the hole by winning business from new home developers and investing to broaden the services on offer. New analytics and data-based tools are proving popular, with many customers tacking extra products onto existing subscriptions. Revenue from new home builders is growing particularly well, but given the sector's exposure to the economic cycle, we're glad it forms a smaller part of the business though.

Overall, Rightmove's dominant market position should stand it in good stead. But increasing risks together with a lofty rating of 28.8 times expected earnings isn't a good mix. The prospective yield is 1.2%, however a policy of paying out all excess cash as either buybacks or dividends, could see the payout rise in the future. Remember though, there are no guarantees.

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Full year results

Average revenue per advertiser (ARPA) finished the year 8% higher at £1,088 per month. This reflects continued growth in advertising from new home builders, uptake in more expensive subscriptions and price rises.

The number of agents using its services dropped 3% to 19,809, reflecting a decline in the number of smaller agencies offsetting strong growth in partnerships with house builders. Rightmove expects this trend to continue in the short term, despite acknowledging an optimistic start to 2020 following the election.

Underlying costs increased in line with revenue and margins remained constant at 75.9%.

Rightmove finished the year with a net cash balance of £36.3m, up from £19.9m last year.

Website traffic was 2% higher over the year, averaging 135 million visits per month - driven by mobile traffic which was up over 14%.

The group completed its acquisition of Van Mildert, landlord and tenant protection specialist, in September 2019.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.