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Mike Goodman

September 2009

Rightmove prospering suggests worst is past

Half-year results send portal’s shares soaring 19 per cent

IT has always been my belief that the estate agency business is first in and first out of a downturn in the housing cycle.

As soon as housing turnover picks up, estate agency profits revive — but the same applies to property websites, judging by the first half results from Rightmove.

After they were published on Friday August 21, the shares shot up 19 per cent to close at 508p.

The following week, they rose another 20p amid a buoyant FTSE Index and the announcements that some of the big institutional shareholders had topped up their holdings.

The half-year results were better than had been expected in the City, while they showed Rightmove remains the leading property market website.

Rightmove’s management takes a sober assessment of the firm’s prospects as they do not expect full year 2009 operating profit figures to match full year 2008 but they expect profit growth in 2010.

Significantly, web traffic has been strong since May, even during holiday periods. This suggests the recovery in property sales which started this spring could last into the winter.

The half -year results to June 30, 2009 do not show Rightmove profits soaring, but they suggest the worst is past while the firm enjoys stronger cash flow and lower borrowings.

Revenue was actually down 11 per cent to £33.6 million, compared with a first half 2008 figure of £37.8 million. But operating costs fell 19 per cent to £13.7 million from £17 million. Underlying operating profit fell four per cent from £20.8 million to £19.9 million.

This figure disguises some extremely positive trends. For example, the gross margins were up from 55 per cent to 59 per cent, net cash flow was up nine per cent from £14.9 million to £16.2 million, while net debt plummeted 58 per cent from £23.3 million to £9.9 million.

Underlying earnings per share rose 13 per cent from 11.3p to 12.8p, while the dividend is maintained at 3p per share.

The number of advertisers fell 13 per cent from 19,300 at June 2008 to 16,870 as at the end of June this year. But since the beginning of this year, the number of advertisers rose one per cent while there was also a one per cent increase in spending per advertiser to £305 per month.

Evidently, the higher charges introduced in 2008 has not resulted in an exodus of estate agents — indeed the retention rate is now 94 per cent.

The number of letting agents using Rightmove has increased 15 per cent to 3,632 during the past six months, but there was a fall off in new homes advertised and in agents for properties overseas.

Meanwhile, there is speculation in the City that Zoopla, the website started with venture capital in 2007, may eventually float on the Stock Exchange.

The speculation was prompted by Rightmove’s results, which suggest a new flotation would be well received by investors, but also by the latest Zoopla deal, the acquisition of rival PropertyFinder Group from News International Ltd and REA Group for an undisclosed sum. The deal comes soon after the acquisition of from the hard pressed Guardian Media Group and will further expand the Zoopla market share. Indeed Zoopla threatens to become a serious rival to Rightmove.

The deal still leaves News International with a stake in Globrix, which unlike Rightmove does not charge a monthly fee to advertisers. I leave Bob North to discuss the further implications of the latest deals in his website column.

...while Connells and LSL stage revivals

IF the Skipton Building Society needs to raise extra cash, a sale of Connells, its estate agency arm, would be one of the options, as the firm once again demonstrates its resilience.

Connells reported a 23 per cent rise in sales during the first half of this year and a rebound in profits as the Skipton Building Society believes the housing market has bottomed out.

Connells group chief executive Stephen Shipperley expects further profit growth during the second half due to strong “pipeline business”.

The contribution of Connells to pre-tax profits of its parent Skipton Building Society was £20.8 million during the first half of this year, compared with only £10.5 million for the whole of 2008.
Mr Shipperley said: “I expect the second half to be even better, due to the strong growth of pipeline business. We recorded 23 per cent more sales during the first half of this year compared to the same period of last year but this understates the recovery as April and May last year were poor months for sales.

“Sales in June this year were double the June 2008 figure. On average we are achieving 65 per cent higher weekly sales than this time last year.”

He said prices “had stopped falling” and there were local shortages of supply. We have been through the worst housing conditions in living memory and I hope we are in a slow but sustained recovery,” he added.

“I must say that I think the chances of a major estate agency group going under this year has receded.”

The Connells figures were released as the Skipton Building Society announced a first half profit of £17 million, compared with only £22.5 million for the whole of 2008.

The society’s assets rose from £13.6 billion to £15.2 billion largely as a result of merging with the smaller Scarborough society. Bad debt provision rose from £7.9 million to £22.1 million but compared with £27 million to the six months to December.

David Cutter, chief executive of the Skipton, said the Connells result suggested the housing market had hit bottom but any recovery will depend on the trend of unemployment.

Anyone who bought LSL Property Services shares a year ago at 80p would have more than doubled their money and anyone who was bold enough to buy at near their November 2008 low of 30p would be laughing all the way to the bank, now the share price breached the 200p barrier.

One of the major shareholders, value investment house Harris Associates LLP, upped its stake in July 2008 to 20 per cent when the share price was about 80p.

Having stuck out the winter doldrums, it appears from information on the LSL website that Harris cut its stake below 15 per cent in August this year. I can’t blame them for taking a 100 per cent profit.

What sparked the rally were the LSL first half results released in early August which showed group underlying profits rose 17 per cent to £10.9 million compared with £9.3 million for the same period of 2008, while pre-tax profits were £4.3 million against a £1.8 million loss in 2008.

LSL own Your Move and Reeds Rains and these businesses are now trading profitably after reporting a £900,000 loss during the first half of this year and even bigger losses during 2008.

However, group chief executive Simon Embley remains cautious about the market in general.
“I am more optimistic about the short term than I was in March this year when we announced our 2008 full year results,” he said.

“I predicted then about 500,000 transactions this year for the market overall. Currently we are running at about 520,000 but if the current trend continues, we could reach 600,000. However, the increase in volume is driven by cash buyers and their number is finite. I’m not denying the market has bottomed out but we remain cautious about the outlook for 2010.”

During the first half of this year the estate agency completed 5,500 sales, compared with about 5,200 a year earlier, and 13,700 for the full year 2008.

Pipeline sales were “extremely low” early this year, reflecting the poor final quarter of 2008, but are now “well ahead “ of summer 2008 levels, according to Mr Embley, who added: “Estate agency still made a loss during the first quarter of this year, broke even during the second quarter and now makes a profit.”

Overall, there was a £900,000 loss on estate agency during the first half of this year, compared with a £5.2 million loss a year earlier.

Lettings income rose 35 per cent to £9.4 million while “corporate activities” such as corporate letting and repossession management made £4 million against only £0.3 million a year earlier when the business was still at an early stage of development.

Surveying showed a 17 per cent profit fall from £15.4 million to £12.7 million as mortgage approvals fell nearly 50 per cent.

Group revenue fell from £93.1million to £74.1 million, so much of the profit improvement was due to cost cutting during 2008. Net borrowings also fell by £18.5 million to £43 million. Adjusted earnings per share were 2.6p against a 1.5p loss a year earlier. The unadjusted EPS figure was 6.5p representing a 27 per cent rise.

Shareholders will still miss a dividend but the group might resume one next year, if profits improve further. Evidently the City believes they will, judging by the buoyancy of the share price.