Investment Case: Rightmove

Rightly proving its resilience in a weak British property market

Introduction

Rightmove (www.rightmove.co.uk) was founded in the year 2000, in the midst of the dot-com boom alongside thousands of other internet companies. Many came to the stock market with a promise of infinite riches, not hindered by any evidence of early success. Instead of revenues or (cough) profits, financial metrics included ‘eyeballs’ or monthly visitors to a website to measure success. Rightmove was founded as a joint venture between four of the UK’s largest property agents and was listed on the London Stock Exchange on March 15, 2006. Rightmove is best described as the UK equivalent of the Dutch property portal Funda (www.funda.nl). It has just about all property agents on its platform. It attracts by far the largest number of searches for UK homes and is one of the most visited websites in the UK. Rightmove helps agents and home builders to transact homes, both for resale and new-build. It also has services for landlords wishing to rent out their properties and has an overseas segment. It is well-known that British people are avid buyers of homes in places such as Spain and France. Rightmove is what we call a ‘typical SilverCross company.’ The reasons will become clear in the paragraphs below. We own the shares since the launch of SilverCross in July 2014.


David Simons

Founder and Portfolio Manager


What makes the company different

Rightmove benefits from strong networking effects. This is a dynamic where more buyers attract more sellers and more sellers attract more buyers on a platform. They each reinforce the attractiveness of the platform. In the case of Rightmove, replace buyers with people searching for a new home, and replace sellers for property agents placing their property inventory online. This networking effect can also be seen at for example Facebook. An increasing user base, attracted by friends also on the network, attracts more advertisers. The network effect creates a winner-takes-all situation. This is most visible in Rightmove’s market share that approximates 80% based on time spent on all property platforms available in the UK market.

A resilient business

In the last couple of years, the British property market has cooled off significantly as Brexit causes uncertainty among home buyers. New regulation on landlords has reduced demand for investment properties. In London, a new set of property taxes also caused demand for high-end properties to plummet. This has led to a fall in home transactions, having a direct and significant effect on property agents such as Foxtons and Countrywide, both LSE-listed companies. The share price of Foxtons has declined by 52% (as of 11 July 2019) since the day after the Brexit vote in June 2016. Countrywide has fared even worse, sinking by 97%, weighed down by debt while facing revenue pressure in combination with a high fixed cost base. Countrywide meets many of the characteristics of companies we aim to avoid at SilverCross – barely any recurring revenue and high financial leverage are just two characteristics that make the business unattractive for us. Aside from transaction weakness, property agents have had to contend with the emergence of low-cost online-only and hybrid agents, that offer to sell houses for a fixed low fee. Still, the threat of these new low-cost agents appears to have been overhyped. The market share of these new agents has stabilized at a much lower level than analysts expected. This suggests that, despite a shaky reputation, the personal touch of a real estate agent handling the purchase or sale of someone’s most important asset is preferred in most cases. Rightmove has seen its stock price increase by 50% in the three years after the Brexit vote. The wide divergence between agents and Rightmove is no coincidence. Rightmove’s revenue model is based on subscriptions. If a property agent wants to sell the homes of its customers, it has no choice but to advertise on the largest property portal. The value of the portal is clear and measurable – agents get referrals directly from Rightmove. Out of all the referrals that come through portals and end up in transactions, 80% come from Rightmove. The strength of the portal has also been reflected in the ability to raise prices somewhat above inflation, with further average revenue per customer increases thanks to innovative new tools that allow agents to sell homes more effectively.

Management

The co-founders of Rightmove, Miles Shipside, Nick McKitrick and Ed Williams became paper-millionaires in March 2006 when Rightmove floated on the LSE for GBP 425 million at an initial stock price of 335p. The stock now trades at above 5000p (as of 11 July 2019). Nick worked for Rightmove for 17 years and was CEO from 2013 to 2017, having been Chief Operating Officer since 2005 and Finance Director since 2009. He now leads homegate.ch, a Swiss real estate portal. Miles Shipside is currently commercial director with Rightmove. Ed Williams retired in 2012. Each of the co-founders had a significant equity stake worth in aggregate over GBP 100m before they retired. SilverCross likes businesses it owns to be managed by owner-operators. Rightmove did fit that criterion when we bought the shares at the time of Fund launch. The current CEO is Peter Brooks-Johnson, who was appointed to the Board in 2011 after joining Rightmove in 2006. The current CFO is Robyn Perriss, who joined in 2007 as Financial Controller and was promoted to CFO in 2013. She has a financial background with online portal Auto Trader. While equity ownership by current executive management is below where we would like it to be, we believe the remuneration policy is such that the incentives of management are directly aligned with external shareholders. Salaries are ‘demonstrably’ lower than market base salaries and benefits, but equity rewards are higher than market, subject to achievement of challenging performance targets. The targets are based on both short, medium and long-term targets. Equity awards are deferred for several years. The goal is to ensure that executive directors own shares worth at least 200% of base salary, and must be held until they retire from Rightmove. The remuneration policy has been drafted in consultation with major shareholders representing over 50% of Rightmove shares. Management has proven its capital allocation skills, allocating its free cash flow to innovation, dividends and share buybacks, eschewing acquisitions, barring a few smaller deals that it made in the first 10 years of its existence.

Low Entry Barrier but High Success barrier

Soon after we made our initial investment in Rightmove, OnTheMarket (OTM) announced that it would enter the market. It was launched by a well-known group of estate agents including Savills, Strutt & Parker and Knight Frank. It sent shivers through investors, believing that OTM’s business model would disrupt Rightmove’s. OTM went to real estate agents and demanded that any agent that signed up with them would advertise on only one other property platform. Up until that time, there were only two significant players, Rightmove and Zoopla, with Rightmove holding about 75% of the market. For agents, the attraction of OTM was that it would charge a significantly lower fee. Agents had become frustrated by the rising cost of advertising on Rightmove, even though the platform was a dramatic saving versus the old way of paper advertising. After analysing the situation, we concluded that the likelihood of success for OTM was small. If they were successful, we felt that Zoopla was most likely to be disrupted. We proceeded to increase our position in Rightmove.

When OTM finally went live, most agents who backed OTM dropped, you could have guessed it, Zoopla, as that was the platform with relatively few users. The entry of OTM thereby served to fragment the market and benefitted Rightmove. Long story short, OTM never became a success. It became apparent that while the barrier to entry was low – anyone can launch a website today – the barrier to success was almost insurmountable. It would require UK consumers to switch en-masse from Rightmove to OTM, without any benefit for the effort. Making OTM known to consumers was also going to be very expensive in terms of marketing outlays.

OnTheMarket failed but did a restart nevertheless by changing several elements of their model, while raising fresh equity via a stock market listing. While the company has been gaining more property agents by offering them a free subscription – an interesting but unsustainable business model – UK consumers haven’t followed. Its market share has been moving in a corridor, since January 2017, of between 0% and 4% versus 77% for Rightmove. The stock has declined by 41% (as of 11 July 2019) since the first day of listing.

Growth prospects

In the years ahead, we expect Rightmove to continue to grow. This will be driven by continued increases in average revenue per advertiser, as Rightmove continues to innovate around conversion rates of visits to leads and data analytics potential. Its mission is to help agents win business efficiently, while offering home buyers the widest choice of properties available on the market. We believe that the roadmap towards more efficiency thanks to initiatives such as increased usage of data, online training and automated pre-qualification of tenants is anything but close to the end.

The engagement on Rightmove’s website and mobile app continues to increase. The number of visitors increased by +4% in 2018 to 1.6 billion, and those visitors spent 5% more time totaling 12.3 billion minutes.

How Rightmove contributes to sustainability

An internet business like Rightmove will always have a much smaller environmental footprint than an industrial business. Still, the service it provides can either cause an environmental impact by its users both positively and negatively.

Rightmove’s model effectively helps home buyers and property agents reduce their carbon footprint. Traditional ways of finding a home tended to involve large amounts of paper and printing, whether in the form of newspaper advertising or leaflet drops by agents. Rightmove has massively reduced the need for print media and the resulting environmental damage.

Also, by improving the quality of the presentation of each house on its portal, it allows home buyers an opportunity to make a better assessment of the attractiveness of the house before visiting. This helps reduce the number of visits to homes that would not meet a buyer’s criteria, thus reducing their kilometers driven.

On its website, Rightmove highlights the responsibility it takes as a responsible corporate citizen. It ranks very highly as being a great place to work. With regards to making a difference to its communities, it launched a charitable fundraising initiative called ‘On The Move’. Its objective is to raise funds and awareness for charitable causes by connecting people particularly in its hometown of Milton Keynes.

In the last two years, it published a gender pay gap report after acknowledging the importance of gender and cultural diversity. It is taking a range of measures to address any imbalances it has diagnosed in the firm, which include more options to arrange flexible work.

Investment case

When we invested in Rightmove in 2014, we appreciated its entrepreneurial organisation. Management was focused on innovation to maintain its relevance in a fast-changing landscape. Its business model, based on subscription revenue, provided resilience in more difficult economic times. Its strong, debt free balance sheet, would shield it from permanent losses caused by a misstep.

We continue to believe in the innovative power of Rightmove and see this as the most important force driving future growth, as it allows the company to upsell to existing agent customers. We do believe that the growth rate is likely to be lower than it used to be as the market matures. The capital return policy that management has instituted several years ago is seen to continue unabated, steadily reducing the share count.

Since SilverCross invested in the shares, the stock has more than doubled. The most recent investment case review revealed enough upside potential to continue to hold on to the shares.

How to invest

Participations in the Fund are qualified for sale in the Netherlands. SilverCross Global Small-Cap Fund does not pro-actively sell participations to investors residing outside of the Netherlands.

The minimum initial investment amount is Eur 100,000. Any subsequent investments must exceed Eur 25,000.

Before making any decision to invest in SilverCross Global Small-Cap Fund, we strongly recommend reading the Prospectus.

SilverCross Global Small-Cap Fund may be distributed through IBS Asset Management BV or through a licensed EU / EVA financial institution. Investors wishing to invest through their own advisor can do so by providing them the following ISIN code: NL0010832242.

All income generated by the Fund is treated as fiscally transparent. This means any income such as dividends and interest are taxed based on your individual tax position. We recommend consulting with your tax advisor about the potential tax consequences. Upon request, a list of all income received by the fund is available for your tax affairs.

For investors whose investments are treated in ‘Box 3’, the value of the Fund as of 1 January of each calendar year must be submitted to the tax authorities without any further requirements relating to income generated by the Fund.

 

Subscription Procedure

Please note that your subscription will be processed the first Transaction date following the receipt of the investment amount, which is weekly on Wednesdays, or the first business day thereafter if the Dutch stock market is closed. The Investment Manager has the discretion to determine additional Transaction dates at any time.

 

Transparency

The Fund Manager encourages potential investors to view an investment in the Fund as a long-term holding. Therefore, in case an investor wishes to sell its participations within 90 days after purchase, an anti-dilution levy of 3.0% of net asset value per participation will be incurred by the investor. This penalty serves to discourage frequent trading in Fund participations.

The Fund Manager is allowed to suspend or limit subscriptions or redemptions in the interest of existing participants. For more information about situations in which this can occur, see the Prospectus.