OnTheMarket Analyst Q&A “enterprise value to continue to increase” (LON:OTMP)

Property Services

OnTheMarket plc (LON:OTMP) is the topic of conversation when Zeus Capital’s Research Analyst Robin Savage caught up with DirectorsTalk for an exclusive interview.

Q1: OnTheMarket, the majority owned company which operates OTMP portal has released its interim results to 31st July. Robin, what were the key points?

A1: Well, I suppose there’s three points, one is that the company reached breakeven, it was able to deliver a profit for the period and the management are now guiding to breakeven for the current year.

Second point would be that in the last 12 months, the business has grown its new homes development listings business to over 1,600 developments with 7 of the top 10 developers and many other really high quality small developers on the site.

The third point is that they are very well capitalised, it’s got sufficient net cash which is currently over £10 million to protect and build its platform.

The wider point is that despite the difficulties created by COVID-19, the company has increased its revenues by 28% to just over £10 million last year, it was £8 million first half. If you exclude the £1.8 million discounts which they gave to its agent customers, these sort of customer support discounts, if you exclude those and look at what the revenues would have grown by, the company grew its revenues by 50% to £12 million so on annualised basis, £24 million, it’s a substantial business.

As a result of tight cost control and reduce overheads and reduced marketing spend, they were able to report a small profit of just under £1 million compared to a loss during the period of building the business of £7 million for the first half last year.

So, I think a really impressive financial performance has been accompanied by a substantial increase in activity in July, August and September after the lockdown has ended and that’s continued through into October, and this is delivering excellent value to its agent customer advertisers.

Q2: Does this mean that you need to change your focus in any way?

A2: We’re going to maintain our current year revenue forecasts at £ 22 million, I think there isn’t a lot of value in just tweaking the number and we just remind you the £22 million assumes that in the second half of the year that the revenues from estate agent customers increase from 11.4, before the customer discount, to 11.5 so a little nudge up.

If they’re able to convert some of the agents who were on a first year free to being on paying contracts that would provide some upside to our forecast but we’re not going to put it in.

Secondly, our forecast assumes that the revenue from new homes developers is going to double from £0.5 million in the first half to £1 million now. Although that may seem like it is a sort of optimistic view, actually what that does is reflect the growth in new homes developers that’s already been achieved in the first half.

So, I feel confident about the £22 million revenue forecast for this year and following management’s guidance, we nudge up our forecasts results for the year from £0.5 million loss to being breakeven. We expect management to continue to invest in the business, invest in people, invest in advertising, we expect the higher marketing spend in the second half and actually the spend to be much more directed to social media.

We sort of look at the business currently, the company has just over 12,000 paying advertisers, that is over 9,400 agent branches and 1,673 new homes developments and with an annual revenue run rate of around about £25 million, the average revenue per paying advertiser is about £174 a month.

As the company continues to deliver value to its advertisers, we see potential for the average revenue to double over time, over a number of years, to sort of £350 a month which, I believe, would represent good value to the advertisers and obviously a good value to the shareholders. As you may be aware, many of the shareholders are actually the advertisers themselves.

So, 2022 forecast, I think we need to have the new Chief Executive Jason Tebb, who joins on the 14th of December, in place before we publish a forecast which we will obviously discuss with him before we make it.

I’m absolutely confident that the company is well-funded and the set for profitable revenue growth through the next year or two.

Q3: Now, I presume that these results impact your view of OnTheMarket’s value and share price?

A3: I suppose in short, these interims give me, and hopefully you, confidence in the net cash per share which is 13p per share and 13p is a good number to be thinking about in terms of net cash per share.

You should be seeing the new homes developers growing, the base of advertisers, and you should see the current year revenue per share, which is £22 million including the customer support discount, but if you exclude that and look at what the current run rate is, the current run rate is over 30p to share, if you’re looking per share terms.

So, if you think about on the company having a number of features, I think you should think about it as having reached its minimum viable production, it is now profitable with contracted revenues of over£ 24 million from these 12,000 advertisers, which more than covers its annual cost base.

I think you should, secondly, be thinking of the company delivering a healthy average of 148 leads a month to its advertisers at an average cost of £174 pounds so I think good value to those advertisers. I think the undiscounted price when all the advertisers are paying what they ought to be paying, is much more like £300 pounds. So, I think there is an opportunity over time for the average revenue per paying customer to substantially grow and remember that £10 million pounds of net cash.

So, if you put all this together, I think you can see that the company has got a healthy enterprise value, well it’s got a market capitalisation of about £74 million at the current share price. If you take off the £10 million of cash, you get more like £64 million enterprise value, and you compare that to the revenue which has been generated, I think you can see that it’s trading at under 3 times the annual revenue, I think really three and a half times the annual revenue is property where it ought to be trading up. If you were to look at it on that basis, you’re probably talking about £94 million to £100 million of equity value is where it ought to be trading.

So in pence per share, think of it as being over 10p per share for net cash and in terms of the actual enterprise value of the business, being more like 110p so actually 120p is probably where the shares ought to be trading at the moment, which is a healthy 26% above the current price.

Obviously, as the business continues to grow, as it grows its advertisers and grows its revenue per advertisers, you would expect the enterprise value to continue to increase.

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