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OnTheMarket — Spreading the word

OnTheMarket — Spreading the word

OnTheMarket has released full-year results to January 2018, just prior to its listing. Of greater interest is the strong progress in recruitment of estate and letting agencies, with listing agreements now signed with over 8,500. This is driving good levels of traffic to the portal, which in turn should demonstrate its value to the agency customers ahead of the end of the discounting. We maintain our revenue forecasts, but have dialled back the anticipated marketing spend in view of the success to date. Our longer-term modelling indicates a return to profit in FY21. On EV/revenue and DCF modelling, the shares have good potential upside.

Fiona Orford-Williams

Written by

Fiona Orford-Williams

Director, TMT

OnTheMarket

Spreading the word

Final results

Media

7 June 2018

Price

162p

Market cap

£98m

Net debt (£m) at 31 January 2018, pre £30m fund raise on listing February 2018

9.3

Shares in issue

60.5m

Free float

41%

Code

OTMP

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

10.6

4.9

N/A

Rel (local)

8.2

(2.7)

N/A

52-week high/low

181.0p

107.5p

Business description

OnTheMarket is an estate agent-backed company, which operates a synonymous property portal. It is the third largest UK residential property portal provider in terms of traffic.

Next events

Half-year end

31 July 18

Analysts

Fiona Orford-Williams

+44 (0)20 3077 5739

Bridie Barrett

+44 (0)20 3077 5700

OnTheMarket is a research client of Edison Investment Research Limited

OnTheMarket has released full-year results to January 2018, just prior to its listing. Of greater interest is the strong progress in recruitment of estate and letting agencies, with listing agreements now signed with over 8,500. This is driving good levels of traffic to the portal, which in turn should demonstrate its value to the agency customers ahead of the end of the discounting. We maintain our revenue forecasts, but have dialled back the anticipated marketing spend in view of the success to date. Our longer-term modelling indicates a return to profit in FY21. On EV/revenue and DCF modelling, the shares have good potential upside.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

01/17

17.8

1.0

(1.4)

0.0

N/A

0.0

01/18

16.0

2.7

7.4

0.0

21.9

0.0

01/19e

18.0

(16.8)

(28.8)

0.0

N/A

0.0

01/20e

35.0

(9.5)

(12.5)

0.0

N/A

0.0

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Good increase in reach

OnTheMarket has added agency branches at a good pace, with over 8,500 now participating, up 3,000 since listing. The recent (May 2018) high-profile TV and outdoor marketing campaign has boosted market recognition and traffic to the portal. YTD, there have been 42.2m visits, up from 21.9m for the comparative period. Management indicates that feedback from the agents is that this is good-quality traffic, with a high proportion of genuine interest, rather than simple browsing. New branches are coming on to the roster on free or discounted fees, rather than in exchange for equity. The group is achieving the quantum of scale needed to make it a credible alternative to the two main UK incumbents, Rightmove and Zoopla. It will also be extending its remit to include new home developers and online agents, as well as advertisers of commercial and overseas properties.

Marketing requirement trimmed

The key financial variables are number of branches, level of listing fee discounting and marketing spend. For the remainder of FY19e, we anticipate slightly more branches than before (see initiation), with a lower ARPA, to give the same revenue number. We have reduced the anticipated marketing spend to £18.5m (was £22.5m) in FY19e and £22m for FY20e (£25m), accelerating the move back to profitability and improving the cash profile.

Valuation: Good potential upside

The share price has recovered to close to its 165p issue price after initial opportunistic selling and currently trades at 3.7x forecast EV/revenue to January 2019, compared with Rightmove at 16.9x and Zoopla at 7.9x current year forecast revenue (9.1x average for a broader global peer set). We have also modelled the DCF, based on a WACC of 10.2%. This derives a value of 355p per share (was 323p), but, given the potential variability of outcomes, we would suggest an execution risk discount of 30% would be appropriate, indicating a price of 249p.

Gaining competitive advantage

The recruitment drive has been successful to date, with joining OnTheMarket an increasingly attractive option to agents as prices for listing their properties on Rightmove and Zoopla continue to increase, albeit at a slower pace. Rightmove’s ARPA on agency property for CY17 was £879, up over 10% on prior year (fees for new home developments are higher; an ARPA of £1,201), while ZPG’s property ARPP (average revenue per property partner) was £484 in H118, up over 6% like-for-like, year-on-year. While there will be regional variations, this bodes well for negotiations later in the year as agencies move toward the end of their discounted period.

With the underlying property market under pressure from fewer transactions taking place and little, if any, house price inflation, estate agents’ commission will be likely to continue to drift. This will inevitably mean that expenses will be more closely scrutinised, putting the value obtained from portal fees into the spotlight. Our model builds an overall ARPA from £163 in the current year to £193 in FY20e and £297 in FY21e (previous assumptions were £176, £198, and £303 respectively); a reasonably cautious progression but very clearly an attractive proposition against the majors, provided that the traffic and conversion statistics remain strong.

Building the team

As well as the marketing effort, February’s fund raise was designed to support building the group’s infrastructure to grow its customer base and support them once on board. The field sales team has been built from 15 to 32 people, while the IT team has increased from 21 to 40. These additional costs are built into our financial modelling and there are no changes to our numbers in this regard.

Changes to forecasts

The FY18 results are for the year ended 31 January, just prior to the listing on 9 February and the £30m capital fundraise, so are, of themselves, of limited interest. Revenue was in line with our earlier forecasts, but the level of administrative expenses was lower than we had anticipated, as was the interest charge.

Exhibit 1: Changes to forecasts

EPS

PBT

EBITDA

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

2018

6.2

7.4

+19

2.2

2.7

+23

5.0

5.4

+8

2019e

(35.3)

(28.8)

N/A

(21.4)

(16.8)

N/A

(19.7)

(15.2)

N/A

2020e

(16.7)

(12.5)

N/A

(12.6)

(9.4)

N/A

(10.8)

(7.8)

N/A

Source: Company accounts, Edison Investment Research

As outlined above, our revised numbers maintain our top line forecast (though with more branches and lower ARPA as a result of the successful recruitment campaign). The main adjustment is in our assumptions on the level of marketing spend needed to drive the recruitment of branches and increase awareness amongst their potential clients. We still forecast the group to move into profitability in FY21, but to a greater degree, with it also turning cash generative in that year.

Marketing spend was one of the variables that we identified in our earlier report in the context of the theoretical valuation. The reduction (on what remains a sizeable figure of £18.5m) naturally has a beneficial impact to the cash flows. Under the new scenario, our DCF (based on unchanged assumptions of a WACC of 10.2% and a long-term growth rate of 0.5%) suggests a value of 355p (was 323p). We then add a 30% discount to reflect the implementation risk, giving an indicative price of 249p, 54% ahead of the current price.

Exhibit 2: Financial summary

£'k

2016

2017

2018

2019e

2020e

31-January

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

17,851

17,831

16,046

18,000

35,000

EBITDA

 

 

(1,140)

3,292

5,353

(15,223)

(7,832)

Normalised operating profit

 

 

(1,729)

2,324

3,887

(17,000)

(9,750)

Amortisation of acquired intangibles

0

0

0

0

0

Exceptionals

0

(3,506)

(1,436)

(2,900)

0

Share-based payments

0

0

(13,290)

0

0

Reported operating profit

(1,729)

(1,182)

(10,839)

(19,900)

(9,750)

Net Interest

(1,394)

(1,351)

(1,231)

185

271

Joint ventures & associates (post tax)

0

0

0

0

0

Exceptionals

0

0

0

0

0

Profit Before Tax (norm)

 

 

(3,123)

973

2,656

(16,815)

(9,479)

Profit Before Tax (reported)

 

 

(3,123)

(2,533)

(12,070)

(19,715)

(9,479)

Reported tax

0

(1,486)

(22)

(631)

1,896

Profit After Tax (norm)

(3,123)

(513)

2,634

(17,446)

(7,583)

Profit After Tax (reported)

(3,123)

(4,019)

(12,092)

(20,346)

(7,583)

Minority interests

0

0

0

0

0

Discontinued operations

0

0

0

0

0

Net income (normalised)

(3,123)

(513)

2,634

(17,446)

(7,583)

Net income (reported)

(3,123)

(4,019)

(12,092)

(20,346)

(7,583)

Basic average number of shares outstanding (m)

36

36

36

61

61

EPS - normalised (p)

 

 

(8.8)

(1.4)

7.4

(28.8)

(12.5)

EPS - normalised fully diluted (p)

 

 

(8.8)

(1.4)

7.4

(28.8)

(12.5)

EPS - basic reported (p)

 

 

(8.8)

(11.3)

(34.0)

(33.6)

(12.5)

Dividend (p)

0.0

0.0

0.0

0.0

0.0

Revenue growth (%)

899.2

98.9

89.0

111.2

193.4

EBITDA Margin (%)

-6.4

18.5

33.4

-84.6

-22.4

Normalised Operating Margin

-9.7

13.0

24.2

-94.4

-27.9

BALANCE SHEET

Fixed Assets

 

 

2,946

3,601

3,672

3,895

4,328

Intangible Assets

2,874

3,556

3,654

3,887

4,023

Tangible Assets

72

45

18

8

305

Investments & other

0

0

0

0

0

Current Assets

 

 

4,200

5,972

3,704

12,148

6,023

Stocks

0

0

0

0

0

Debtors

638

3,709

530

1,589

4,023

Cash & cash equivalents

3,562

2,263

3,174

10,559

2,000

Other

0

0

0

0

0

Current Liabilities

 

 

(3,872)

(7,316)

(5,454)

(6,091)

(7,252)

Creditors

(2,907)

(5,937)

(4,215)

(4,874)

(6,035)

Tax and social security

0

0

0

0

0

Short term borrowings

(965)

(1,379)

(1,217)

(1,217)

(1,217)

Other

0

0

(22)

0

0

Long Term Liabilities

 

 

(9,740)

(11,256)

(11,610)

(1)

(704)

Long term borrowings

(9,740)

(11,256)

(11,256)

(1)

(704)

Other long term liabilities

0

0

(354)

0

0

Net Assets

 

 

(6,466)

(8,999)

(9,688)

9,952

2,395

Minority interests

0

0

0

0

0

Shareholders' equity

 

 

(6,466)

(8,999)

(9,688)

9,952

2,395

CASH FLOW

Op Cash Flow before WC and tax

(1,140)

2,896

5,353

(15,223)

(7,832)

Working capital

3,509

(42)

415

(392)

(1,246)

Exceptional & other

0

(3,506)

(1,436)

(2,900)

0

Tax

0

(1,486)

(22)

(631)

1,896

Net operating cash flow

 

 

2,369

(2,138)

4,311

(19,146)

(7,182)

Capex

(2,008)

(1,623)

(1,538)

(2,000)

(2,350)

Acquisitions/disposals

0

0

0

0

0

Net interest

(998)

(937)

(1,393)

(1,115)

271

Equity financing

0

0

0

41,255

0

Dividends

0

0

0

0

0

Other

0

1,516

0

0

0

Net Cash Flow

(637)

(3,182)

1,380

18,994

(9,262)

Opening net (cash)/debt

 

 

5,714

6,747

10,372

9,299

(9,694)

FX

0

(30)

0

0

0

Other non-cash movements

(396)

(413)

(307)

(0)

0

Closing net (cash)/debt

 

 

6,747

10,372

9,299

(9,694)

(433)

Source: Company accounts, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by OnTheMarket and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by OnTheMarket and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Research: TMT

Artec technologies — Positioning for growth

artec spent the 2016/17 period highly focused on modernising its software platform and, as a consequence, revenues dipped by 41% in FY17. However, in recent months, the company has won three prestigious new contracts with high-profile customers in Germany. These contracts provide a significant endorsement of the new platform, and the artec carried out a 10% capital increase to provide working capital to help deliver these contracts. If management can successfully scale the business, we believe there is significant upside in the shares.

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