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Rightmove - discounts hit first half, but cautiously optimistic

Emilie Stevens, Equity Analyst | 7 August 2020 | A A A
Rightmove - discounts hit first half, but cautiously optimistic

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Rightmove plc Ord GBP 0.001

Sell: 744.80 | Buy: 745.20 | Change 7.20 (0.98%)
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First half revenue was 34% lower than last year at £94.8m, reflecting the 75% discount Rightmove offered customers between April and June this year. Despite a slight improvement in costs, operating profits were 43% lower at £61.7m.

Since the property market reopened Rightmove says demand has been strong, which it attributes to people reassessing housing needs post lockdown and the UK's stamp duty holiday.

However, uncertainty still remains, and Rightmove is unable to provide full year profit guidance. The group will reinstate the dividend when it feels "prudent" to do so.

The shares rose 3.5% on the news.

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Our view

The UK property market's been closed over lockdown and that's hurt Rightmove and the estate agents and new home developers it relies on. While there are early signs the housing market's recovering, we have doubts over how long this will remain the case.

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.

But estate agents were already struggling prior to the crisis, grappling with rising costs and the loss of customers to cheaper, digital rivals. And coronavirus has turned up the pressure, with the longer-term outlook for demand still very uncertain.

To help ease the pain Rightmove's been discounting its fees heavily and will continue to do so until the end of September. That's denting earnings significantly but it seems to be doing the job for now - keeping customers on the platform.

We worry however, that may not be enough. When the UK is weaned off its furlough lifeline later this year and we get a truer picture of how the economy is faring. We expect some form of financial lifeline for Rightmove's customers is still likely to be needed. The discounts are expected to cost around £86m in revenue this year, and it's not a desirable long term plan.

For a business model that's relied on regular price hikes, that makes growing profits more challenging. Rightmove's fees in normal times of around £1,100 a month are still below the agency £2,500 print marketing fees of previous decades. But with price hikes out of the question for now, finding additional ways to increase profit per customer is essential to long term growth. Product innovations are helping but extra bells and whistles packages, may prove less popular in a downturn.

To Rightmove's credit, it continues to be an incredibly cash generative business. Costs are low because the group essentially runs a website, meaning the business model is an attractive one.

This together with the group's dominant market position means Rightmove should be able to weather the current storm, and is well placed to capture demand once the economy stabilises.

Unfortunately, that's very much outside of the group's control and for now investors should be prepared for things to get worse. With a price to earnings ratio higher than normal too, it's worth remembering the share price will be sensitive to any shocks or disappointments.

Rightmove key facts

  • 12m forward Price/Earnings ratio: 35.8
  • Ten year average 12m forward Price/Earnings ratio: 25.3
  • Prospective yield: Rightmove is not currently paying a dividend

We've introduced this section in response to recent survey feedback.

Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Half Year Results

Since the start of the year membership dropped 3.3% to 19,158, with both Agency and New Home customers falling.

Agency revenue of £66.6m was 36% lower. That reflects the lower average revenue per agency (ARPA) which fell by £338 to £685. The decrease is a result of the fee discount. The majority of agencies are said to have kept their product and packages throughout the period, with spend increasing again in June.

New Home revenue of £17.3m was 38% lower, with New Home ARPA falling by £510 lower to £836. New Home customers also received fee discounts, and despite reducing spending over lockdown customer spending has seen a "strong" return as construction has resumed.

Other revenue, which includes Overseas, Data Services, Commercial and Third Party advertising services, declined by 4% in the first half of 2020 to £10.9m.

Operating costs were 7% lower at £33.1m, reflecting: the group's decision to reduce board and senior manager pay over lockdown, furlough around a third of employees, reduce marketing spend and seeing less discretionary costs as staff work from home. Rightmove will repay the £0.7m it received from the furlough scheme by December, and marketing and staff costs are expected to increase in the second half of the year.

Reflecting lower profits, free cash generated by group fell to £46.1m (2019: £90.4m). Although cash generation remained above 100%. Throughout the period, the group was debt free and had a closing cash balance of £50.3 (2019: £36.3m).

Rightmove has recorded 65 of its busiest days on record since the UK property market reopened, with total visits 5% higher than last year. In June and July, the demand for sales properties was up 50% with rental demand over 20% higher.

Find out more about Rightmove shares including how to invest

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 for more information.