Turkey of the week: precarious property business
By
Paul Hill Oct 16, 2009
Print this article
Napoleon once famously dismissed Britain as "a nation of shopkeepers". Two hundred years later, the national addiction is property. So much so that a smallish bounce in British house prices has triggered a staggering 360% jump in Rightmove's shares over the past nine months. So are happy days here again for Britain's biggest property website?
Rightmove owns the Rightmove.co.uk domain and generates income from customers (largely estate agents) who wish to advertise houses, new developments, lettings and overseas properties. And like most things internet related, it has been relatively well insulated from an overall decline in transaction volumes. That's because its online service has benefited from the structural shift in marketing spending from traditional print media (such as local newspapers) onto the web.
Indeed, the bulls argue that the board is making all the right moves, with first-half results in August coming in better than expected. Their case is strengthened by July having been the strongest month this year for house buying, with encouraging signs evident in the market for lettings and holiday units too.
Rightmove (LSE: RMV), tipped as a BUY by Panmure Gordon
Yet the hard truth is that there's no quick fix for Britain's battered property market, and this year's improving numbers should not be taken as evidence of a new trend. The British housing market is built on quicksand rather than solid foundations, so it's only a matter of time before there's another sickening lurch south.
Only last week, global ratings agency Fitch estimated that residential property would drop another 10% to 15% due to stagnant wage inflation, rising unemployment, public-sector cutbacks, poor credit availability and toppy prices.
This wouldn't matter too much if Rightmove's valuation had already factored in further weakness. But that's not the case. Instead, the City is predicting 2009 sales and earnings per share (EPS) of £68.8m and 24.5p respectively, rising to £77m and 28.6p in 2010. This puts the shares on a racy 2009 p/e of 24 times and a jaw-dropping enterprise value to sales multiple of ten times.
The last time I saw such a high-octane rating was during the dotcom boom. Sure, lucrative operating profit margins of 59% are attractive, but these will eventually bring in aggressive new competitors. These could come from many directions, including the large social networking sites, not to mention the likes of Google and Craigslist.
For evidence, look at how Friends Reunited's dominance in connecting old school/college friends has been wiped out over the past five years by the expansion of Facebook, Twitter and Myspace.
Given these risks, along with the possibility of another surge in estate-agent bankruptcies, I value the shares on a multiple of five-times sales. This generates an intrinsic worth of around 300p a share, or about half of today's level.
Recommendation: SELL at 581p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments
Published in
Tips & advice
| More
articles
by
Paul Hill
Related articles
-
By Jody Clarke, Nov 20, 2009
-
By John Stepek, Nov 20, 2009
-
By Paul Hill, Nov 20, 2009
-
By Paul Hill, Nov 20, 2009
FREE - MoneyWeek's daily investment email
Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.
