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Rightmove downgraded; UBS recommends cashing in on merger mania

UBS likes the company but not the shares at this price and it does not think the imminent half-year results will change its mind
House
"A weak macro is negatively impacting house prices," UBS said

It's time to take profits on Rightmove PLC (LON:RMV), says UBS, after the recent strong run.

The shares received a lift when Silver Lake's bid for its smaller rival, ZPG, in the online property listings sector, and are now too dear, the Swiss bank reckons.

READ: ZPG posts 41% jump in first-half earnings, weeks after agreeing to a £2.2bn takeover​

Based on UBS's forecast earnings for 2019, the shares are trading on an earnings multiple of 27 and that is too high in UBS's view.

According to UBS's number crunching, that earnings multiple implies a 10-year revenue compound annualised growth rate of around 95% compared to the bank's own project of around 7%.

It's true, the consensus forecast for growth in 2018 is 9% but UBS thinks the consensus is too optimistic for four reasons.

Firstly, UBS reckons the UK property commission pool is expected to remain depressed; online agents have already cut commission rates.

Secondly, the digital revolution – Facebook et al - is shaking up the rental market, which currently accounts for around 20-25% of industry revenues.

Thirdly, UBS said there is “limited visibility into Rightmove's product pipeline”.

Finally, “pricing levers and market share gains” could be constrained following the takeover of ZPG, operator of the rival Zoopla site.

On the other hand, there is also the possibility of further sector mergers & acquisitions activity, but on balance, UBS thinks the current price of 5,124p is too good to resist, although it has increased its price target for Rightmove to 4,900p from 4,300p, based on discounted cash flow (DCF) analysis.

“Our DCF assumes Rightmove can grow revenues at a 7% over the next 10yrs, with flat EBITDA margins and a terminal growth of 2% in line with house price inflation,” the broker said.

Shares in Rightmove were down 1.8% following the downgrade but are still up more than 11% since private equity firm's

 

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Rightmove PLC Timeline

Article
February 12 2015

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