Just occasionally the City astounds me. On the one hand it takes a very negative view of one property stock (see Tip of the Week: a high-risk punt on the UK housing market), whilst it puts another on a ridiculously high multiple:
Turkey of the week : Rightmove (RMV), tipped as a BUY by UBS
Rightmove is currently on an astronomical multiple of over 12 times 2007 sales. The last time I saw such a hi-octane rating was during the dotcom boom. The company is the UK’s leading residential property internet portal, originally founded by the Halifax, Connells and Countrywide. The website generates income from advertising houses, new home developments, lettings and overseas properties. Advertisers can upload all of a property’s details, from photographs to maps and even virtual tours.
On 6 July, Rightmove released an upbeat trading statement, underlining its dominance in the online market. All 15 of the largest estate agents and 19 of the top 20 developers now list on the website. Traffic went up 58% in the first half with 24.3 million visits per month, while the number of advertisers rose 26% to 18,515. The group also experienced “continued growth in new members and high retention rates… whilst its 67% stake in a holiday lettings business was also trading ahead of expectations”.
Fine so far, but with such a strong position in the UK, where is the growth going to come from to justify the sky-high rating? More worryingly, cracks are starting to appear. Tempted by the lucrative operating profit margins of 50% plus, competitors such as Tesco and Asda are dipping their toes in the market. And with the growing importance of social networking sites, together with the threat from classified listings on Google and Craigslist, over time the environment will become much more competitive. Just look at the way Friends Reunited’s dominance in connecting old school friends has dwindled over the past three years, due to the impact of Facebook and Myspace. Finally, if the UK housing market does soften in the coming years, then this will surely hurt Rightmove’s future turnover and earnings. The City expects 2007 sales and earnings per share of £54.7m and 15.9p respectively, rising to £71.7m and 22.7p in 2008 – thus putting the shares on a racy 2007 p/e of 35 times. With the best of the UK property market behind us, I would instead value the shares at around 300p, or about half their present level. The CEO and CFO together sold around £5m worth of stock in March at 480p, while the company listed on the LSE in March 2006 at 335p. My advice would be to follow the directors’ lead and take profits.
Recommendation: SELL at 582p