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 residential property portal listed on AIM, announced the acquisition of Glanty, a prop-tech business. Robin, how important is this acquisition for the company?
A1: Glanty is a prop-tech business which will enable the company’s new Chief Executive Jason Tebb to achieve his objectives so it is very important and the objectives are, let’s name four of them:
One, to invest in new products and services creating new tools for the agent to use the platform. Number two, to deliver more engagement for property buyers and property sellers, providing more information, access to technology and services which would help those buyers and sellers. Number three, to work with agents and property developers to help grow their businesses and four, to create partnerships with firms servicing the property agents and developers.
So, Glanty is the owner and developer of software products and services designed to reduce overhead, maximize efficiencies, and increase revenues for estate agents and letting agents. Glanty has developed ‘techlet’, an automated end to end platform that enables letting agents to work remotely and provide services including:
- Tenant referencing and insurance cover, they’ve got a partnership with Canopy,
- Inventory management via a relationship with Katur’s ‘No Letting Go’ software,
- Licensing checks via Kamma for mortgages, for landlords via Mortgage Advice Bureau
- Property maintenance via Fixflo and
- Utility management via Tenant Shop.
That’s just the beginning of the partnerships and there’ll be more to come.
Essentially, techlet enables letting agencies to build their own integrated systems with an appropriate revenue sharing arrangement that benefits the tenants, the agencies, the service providers, and of course techlet and by extension OTMP.
So Glanty has developed, in recent months, similar tools for the residential sales market and also in time will develop tools for the home developers.
So, in Zeus’s view, in my view, Glanty provides the company with tools to rapidly build out further significant partnerships to its network of estate agents and housebuilders.
Q2: What is the financial impact of the Glanty acquisition?
A2: The company has exercised its call option to acquire the 80% of Glanty that it didn’t acquire on the 21st of December 2019, when it invested £750,000 to acquire that 20% stake.
The exercise of the call option will cost another £2.9 million and during the three year earnout period, there will be potential earnout of up to £12 million payable in cash or shares at the company’s discretion based on 1 times recurring revenue and 1.5 times recurring EBITDA for the 12 months to May 2024.
So, we should think, first of all, where is Glanty at the moment? Well, it’s growing fast, in calendar year 2020 its revenues increased to £0.9 million from £0.5 million the previous year and it’s within a couple of hundred thousands of breaking even. OTMP’s financial year to January 2022, Glanty will contribute eight months of revenue which would be a small contribution to revenue and probably immaterial contribution to EBITDA but potentially be material to January 2023 and 2024.
So, when we think about the potential earnout, if we were to think about the full £12 million payout, that is consistent with annual revenues of £6 million pounds and EBITDA contribution of say £4 million pounds a year so you can see that is quite material to the company at the moment. So, if we think about the company’s current investment in Glanty, it’s £3.7 million to date, and in total, the investment could be a maximum of £15.7 million, including the earnout.
In my view, the terms of this deal are attractive to both Glanty and OTMP. Glanty will be able to grow its customer base using the connection that the company is able to provide and OTMP shareholders will be able to buy into its technological platform on no multiples.
So, you could see the valuation on an earnout could be say a 3.9 times EBITDA or expresses a multiple of revenue of 2.6 times revenue.
Q3: How would you assess the value of the OnTheMarket shares?
A3: Well, I think we should do the same thing that we do with other platforms, especially those which are emerging, and first of all look at the balance sheet.
So, the company has a strong balance sheet, in the recent trading update, they mentioned that their cash was just under £11 million of net cash, they have a contracted revenue stream, which is more than its fixed cost base. For the year to January 2021, the adjusted profits will be over £2 million and the revenues for the year to January 2021 will be £23 million, after a £2.6 million COVID discount provided to agents.
They have a very high quality client base with over 69% of UK estate agents branches advertising on the OTMP and with 9 out the 10 top property developers also on the new build platform they have. Now, it has an exceptionally wide range of partnerships to add to its ecosystem.
If we’re looking out to revenues for the current year, we should expect continuing contracted revenue stream to be the base. The benefits of the unwind of the COVID discount we should expect organic growth, particularly in the new home developer segments where that showed very strong growth through the year, last year and there’ll be new developments being added and each developer will be adding new developments hopefully as the year progresses.
Fourthly, we now have the additional eight months of revenue from Glanty so I’m confident that Glanty will add materially to the company’s recurring revenues and earnings per share and consequently, I think that it’ll add materially to the company’s enterprise value.
As a multiple of current year revenue, they are trading at under 2.5 times revenue and I think, given the high drop through profitability of all the revenue growth, I think the multiple ought to be higher. By reference, and it is just by reference because obviously right, Rightmove is considerably larger and also is operating on a very high operating margin, but Rightmove trades on over 16 times revenue so reflecting the very high drop through margin on Rightmove’s business.
Into this year, we expect the company’s management to report the full year results to January 2021, which they’ve already provided a detailed trading update. When we have the full results, and we’ve got a clear comment about current trading, I will publish revenue and profit forecast for, not only this year but probably for the year to January 2023 and 2024.
I think at that stage, I think investors will have a very clear view on the main attractiveness of the company’s business and in particular, the value which Glanty is going to bring.