OnTheMarket PLC (LON:OTMP), Last Friday, Rightmove, the larger peer of OnTheMarket, released results which revealed:
10% rise in revenues and underlying operating profit, driven by a 9% increase in Average Revenue per Advertiser (ARPA) which reached £1,005/month (Exhibit 4 of this note);
3% fall in leads to advertisers (Exhibit 3 on page 3 of this note);
Guidance for 2019 is for 10% rise in revenue and c£5m rise in costs, with operating margin remaining at around 76%.
In response to an analyst’s question, Rightmove’s CEO told analysts that “Cost per lead is the wrong way to look at Rightmove”.
Zeus view. Cost of customer acquisition (e.g. cost per lead) is vital for most businesses. Estate Agency is no exception.
The number of quality-leads compared to the fees paid by Estate Agents (i.e. quality-leads for £100 marketing spend) is the important number for every Agent advertiser.
For the past three years, while Rightmove has increased its Average Revenue Per Advertiser (ARPA) strongly, the number of leads it provides to its Advertisers has fallen (see Exhibits 3 & 4).
We calculate the “leads per £100 spend” on Rightmove has fallen from 28 leads in 2015 to 17 leads in 2018 (Exhibit 5). The marketing yield Rightmove provides its advertisers is falling.
Expressed as “cost per lead”, the cost of Rightmove marketing has risen by 64% over three years from £3.58p to £5.88p. In 2018, average cost per lead rose 13.5% (Exhibit 6).
Valuation. Equity value/office. In our opinion equity market value per office is a useful indicator. At 131p a share OTM has over 12,500 offices and is trading on an equity market cap of £81m (i.e. only £6.5k/office; Rightmove is trading on £236k/office ex New Homes developments), which does not reflect the value of these relationships which we estimate to be more than £20k/office.
By 2020-21, with OTM portal delivering an EBIT margin of over 30%, we would expect OTM to trade on over £20k/office, which would be consistent with a fully diluted share price of over 300p a share.