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Rightmove - property market buoyant but long term unclear

Emilie Stevens, Equity Analyst | 23 June 2020 | A A A
Rightmove - property market buoyant but long term unclear

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Rightmove plc Ord GBP 0.001

Sell: 745.60 | Buy: 746.00 | Change 8.00 (1.08%)
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Rightmove's extending the discount it gives to Agency customers over summer to help mitigate coronavirus disruption to cash flows. Extending support over August and September will reduce full year revenue by £17m - 20m, in addition to the £65m - 75m revenue impact from the existing discount (April to July).

Over the first six months of the year membership dropped 3.8% to 19,054, driven by fewer Agency customers.

Rightmove said there's been a strong bounce back in housing demand since the English property market reopened but the longer term impact of coronavirus remains unclear. As a result no guidance on future profits can be given at this stage.

The shares dipped 0.8% on the news.

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Our view

The UK property market's been closed over lockdown and, unsurprisingly, that's hurt Rightmove and its customers. While there are early signs of a buoyant housing market, we have doubts over how long this will remain the case.

As the first port of call for over 85% of home buyers, the group's dominant market share puts it in a good position and we think its longer term attractions remain. But with the housing market likely to get worse before it gets better, we expect it to be a challenging few years for the group.

Rightmove earns its revenue by charging fees to estate agents looking to access its sizeable audience. On paper, a slowdown in the housing market shouldn't matter too much, as it charges on a per office not per housing transaction basis. So as long as estate agents weren't closing, the fee was paid and it was business as usual.

However, estate agents are struggling and coronavirus has turned up the pressure. Prior to the crisis agents were grappling with rising costs and the loss of customers to digital estate agents like Purplebricks - who are able to offer agency services at a fraction of the price.

More recently, the pandemic shuttered the property market and while doors are now open, struggling businesses and high unemployment are not ingredients for a sustained housing boom. As the UK is weaned off furlough schemes towards the end of the year - we expect the worst is yet to come. The result could be more of Rightmove's customers going out of business.

Such an environment doesn't bode well for price rises either, although we don't see this as a permanent problem. 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. And since it's just managing a website, any higher prices near enough drop straight through to profit. High margins and low capital requirements make for an attractive and cash generative business model.

Overall, Rightmove's dominant market position should stand it in good stead once conditions return to normal. But normal is looking increasingly far away which is going to hit earnings this year at least. For now the dividend is suspended. The full extent of the damage will depend on how long the disruption lasts, and how quickly the economy recovers.

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Trading details

Between April and July all Agency and New Home customers received a 75% discount.

In England, where the property market reopened on May 13, Agencies will receive a 60% discount in August and 40% in September. In Wales (where the property market reopened on June 22) and Scotland (reopening on June 29) the discount will stay at 75% in August, falling to 60% in September.

Since the English property market reopened Rightmove have seen some of the busiest days on its platform ever. The number of sales agreed is currently over 10% higher in England than a year ago, but the group attributed some of this as a result of the property markets being closed in lockdown.

Of the lost 755 members, 620 were Agencies and 135 New Home developments. Rightmove said that traditional agencies are proving more resilient than virtual branches of hybrid agents (lower cost largely online services).

The group has taken a number of measures to conserve cash. These include: voluntary leadership salary reductions of 20%, a third of employees have been furloughed over lockdown and VAT payments have been deferred until next year.

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