Rightmove PLC (LON:RMW) might struggle to accelerate average revenue per agent (ARPA) growth given the weakness in the UK housing market, according to UBS.
UBS downgraded its recommendation on the property website’s shares to ‘sell’ from ‘neutral’ but raised its target price to 505p from 500p.
The broker noted that Rightmove shares have continued to rise since it downgraded to a ‘neutral’ rating in March. The shares are up 30% in the year to date.
READ: Rightmove downgraded by UBS on valuation grounds
UBS said its valuation model suggests the market is pricing in a 7-8% compound annual growth rate for fiscal years 2018-28, compared to its estimate of 6%.
To sustain 7-8% growth rates, UBS thinks Rightmove will need to improve ARPA growth from £85 per year in 2019 towards £120.
“Given a weak UK housing market (low price growth, commission rates under pressure, declining volumes), we think this will be challenging,” UBS said.
Revenue growth to slow
The investment bank expects Rightmove will be able to grow revenues at 5% per year without further reducing agent profitability, supported by annual house price growth of 2%, market share gains of 1% per year and further shifts in offline to online spend.
However, UBS said this implies a slowdown in revenue growth from the 10% reported last year, unless agents can also accept lower profitability.
“We think this will be challenging for two reasons: 1) Agent EBIT margins appear to have suffered materially (-600 basis points) over the last few years; 2) While London agents are an attractive target (with 4x commission per house sold than agents ex-London), the London market has been particularly weak,” it said.
“Even if London agents were to pay Rightmove the same share of revenues as agents ex-London, this would only add 170 basis points to revenue growth, implying we would still see a deceleration.”
For the 2019 financial year, UBS expects Rightmove to post revenue of £289.1mln, compared to £267.8mln last year, and earnings (EBIT) of £214.9mln, up from £198.6mln a year ago.
Shares dropped 3.5% to 533p in late morning trading.