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OnTheMarket Analyst Q&A: Profitable scale as demonstrated by cash generation (LON:OTMP)

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

Q1: OnTheMarket has released information for the month of August which reveals quite a few things. Firstly, that it provides over 2 million leads to its members, secondly that it’s received over 27.5 million visits and thirdly, that it’s ended August with £10 million of net cash. Robin, can you explain the relevance of all this information for us?

A1: First of all, the last point which is the £10 million of cash at the end of the month, that is an increase of £0.69 million which indicates in the month of August, it was generating cash, indeed for the first 7 months of the current year, it generated £1.3m of cash generation. So, this proves that they are growing profitably. The other two points are really showing evidence of the company’s growth.

So, the 27.5 million visits shows huge engagement with property interested market in the UK. Just think about that in terms of the 60/70 million people in the country, obviously a lot of children and a lot of people not in property so to get 27.5 million visit is quite a large amount of engagement with people who are genuinely interested in property.

The second number is the 2 million leads which reflects the service that the company is providing to its paying members, to the people who pay subscriptions to the company and that is the estate agents. So, think about a member might be paying say £300 a month, they were getting 126 leads on average in January and they’re now getting 134 leads in June and 149 leads in August.  

So, if we express that in terms of leads per £100 spend then the typical estate agent using OTMP was getting 42 leads in January per £100 spend, 45 in June and 50 leads per £100 spend in August. 

Now, how important is that and how comparable? Well, I calculate the number for Rightmove to be more like 20 leads per £100 spend.

So, OTMP in January was already delivering twice the yield in terms of leads per £ spend and it’s gone up from being around about just over 40 in January to 50 now so a significant increase in the utility of the service that they provide to its members.

Q2:  You say that OTMP attributes its growth to its “New and Exclusive” product. What does this mean in practice?

A2: Well, an increasing number of the estate agents are listing properties either exclusively with the company or are making the properties available to the company before they are released to other portals such as Rightmove and Zoopla.

So, the company’s exclusivity is benefiting the agents and their clients, as well as the company itself by getting good engagement with the underlying members of the public who is interested in buying or selling a property and it’s providing a very high utility in terms of the effectiveness of the marketing spend for the agent.

Critically, the agents that use the company exclusively are getting more for less and they don’t need to pay the high prices that are being charged by other platforms. 

Q3: Finally, how can investors value a business which for the first 7 years of its existence has operated at a loss, and has only recently generated a cash surplus?  

A3: I guess you could’ve asked the same question of Rightmove because when it floated in 2006, it was generating a loss and it has been in existence for 7 years and yet, that business now is worth £5 billion so it’s really about the way in which businesses get created.

So, in 2013, OnTheMarket was created by Knight Frank, by Savills, Strutt and Parker, Glentree Estates, Douglas and Gordon, Chestertons. These estate agents, they’re typically London and the South-East, they’re typically high-value estate agents, saw the strategic weakness that estate agents were in and the way in which Rightmove was in a position to push prices up and up and up and up. Essentially, for estate agents and effectively their customers, they were on a price escalator and it was just a question of how quickly they could be pushed up that price escalator, they certainly weren’t going down.

So, these estate agents, they’re very well-known names, decided to set up Agents Mutual to create OTMP and they have grown the estate agents membership to over 12,000 estate agent offices so that is a very significant number of estate agent offices.

There are approximately 18,000 estate agent offices across the country, it all depends on what you define as being an estate agent office so what I would say is the  through providing an excellent service at a much lower cost to really good brands, the niche brands, the really high quality agents, a large number of them are on the company’s portal and an increasing number are exclusive on OTMP.

So, really the question is so how do we look at the losses that have been made? Well, in the first 7 years they’d recorded an operating losses which total over £30 million and I think you should see that as being the cost of construction. Obviously, if you are delivering a service at a lower cost, you are not going to making the revenue that you would otherwise be making and obviously initially you are sub-scale.

They’ve now got to a situation where they are at profitable scale as being demonstrated by the cash generation. The last year, they generated revenue of just under £19 million, this year after discounts it should be over £22 million and I think for the year after, we should really be thinking with a number that’s above £30 million.

Really, the question is what level of profitability and what level of dividends might you get from this business and I would say look at the business in the context of a multiple of revenue rather than a multiple of dividends or profits.

So, if you look to the business which was trading on a PE of 15 and was operating on a 25%  operating margin then it would be effectively on 3.0 times revenue. If you look at OTMP what you’re looking at, at the current price, is an equity market value of £66 million, so £56 million excluding the cash, and so really what you’re looking at is something which is trading on 2.5 times the current revenue per share. What you should be looking at over the next few years is an increase in reported revenue as the discounts unwind, as the customer base continues to grow, as new products come through, you should expect revenue growth and you should expect that multiple to go from 2.5 times to 3 and perhaps higher.  

So, as the operating profitability rises from slightly negative last year to being positive this year and rise to a sustainable level. Bear in mind that the company has operated on a 75% operating margin so I doubt the company will be getting there because they are committed to delivering excellent value to their paying customers. That excellent value means keeping the prices low which means the operating profit margin is going to be a more sustainable low number than the 75%, probably somewhere between 25%-50% once the business gets some security.

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Disclaimer: Statements in this article should not be considered investment advice, which is best sought directly from a qualified professional.