The contrasting fortunes of Rightmove and Foxtons

One of the more creative reasons the estate agents are giving for a lack of viewing appointments is that potential buyers were settling down to watch the Olympics – which, given the time difference with Japan, must mean that people regularly view houses at 2am on weekday mornings. Apart from the disruption caused by the pandemic, and the Olympics, obviously, the industry has had a good year with the government’s stamp duty holiday firing up the market for property outside of the big cities.

While anyone can do well in a boom, and the stamp duty tail-off is currently cooling the market, what has become obvious is that the traditional business of bricks and mortar high street estate agents is losing out when it comes to making real money out of advertising property. As with so many other industries, technology platforms now have the edge, with a limitless shop window for consumers to browse for their dream homes.

The gulf widens  

The ever-widening split between the two business models was well illustrated by interim results for Foxtons (FOXT) and Rightmove (RMV). Foxtons, with its absurd branded cars and troubled past involvement with private equity, makes an operating margin (operating income/total revenue) of 6.5 per cent. Apply the same formula to Rightmove and the platform business generates an operating margin of 76 per cent, with free cash flow in the half of £118m and a cash conversion rate of over 100 per cent.

Surprisingly, Foxton’s free cash flow yield is three times greater than Rightmove’s, but this is a technical quirk caused by its much lower share rating. To be fair, the company did reinstate its dividend at these results and expects to pay out around 40 per cent of its net profit in future to shareholders. Rightmove also hinted at higher pay outs by repeating guidance that it expects to end the year with a net cash position of £50m, compared with its current level of £67m. Given that Rightmove cancelled its revolving £10m credit facility for lack of need, it seems likely that shareholders will see funds added to dividends and buybacks before the year is out.

The key difference between the two businesses is that Rightmove simply has a much lower cost base. Take the cost of lease liabilities as an example. In the half, Foxtons had £41m of lease liabilities on its balance sheet, while the corresponding figure for Rightmove was just £2.1m. The difference is explained by the need for Foxtons to keep lots of agent offices open in various High Streets, while Rightmove simply needs a warehouse for its servers.

In short, generating profits for Foxtons takes quite a lot of hard work, and it only really gets paid when a house is sold, whereas Rightmove earns money from the listing regardless of the status of the property – though admittedly it is ultimately dependent on agent marketing budgets and the general state of the market. However, the key point is that its low costs leave it far less exposed when times are tough.

One interesting note to come out of Rightmove’s results is that the platform can suffer if the housing market is doing too well. New developments, particularly, have largely been forward sold and developers have apparently cut back on their discretionary advertising i.e. If houses are selling themselves, then why bother to advertise properties with the platforms? However, many of Rightmove’s existing agency customers stayed with the platform and average revenue per agent increased by £445 to £1,329 as volumes increased and discounting was reduced.

How to value the shares

On just about every level, Rightmove is by far the better quality prospect and our buy tip is in positive territory after a ropey start to the year. We maintain that recommendation on the clear basis that any potential price weakness as the market cools is an opportunity to top up the position. The shares trade at a hefty forward P/E for 2022 of 30, but then quality comes at a price. Buy.

Foxtons, for all its quirks, has done reasonably well to claw itself back from the brink on several occasions, but we still the view the business with caution in the long term, given its high operating costs. The share price looks better value at a forward P/E of 21 and, while the lower rating leaves room for relative outperformance, it is still far more exposed on an operational level to a fluctuating housing market. Sell. 

Foxtons - Last IC view: Sell, 34p, 04 Nov 2020

Rightmove - Last IC view: Buy, 573p, 26 Feb 2021