OnTheMarket (OTM) continues to make good progress in building its market share and improving its brand recognition both with agents and the public. The group now has over 11,000 agency branches under listing contracts – a 58% share of the total. This increased reach is driving higher levels of traffic to the portal and delivering good leads to agents. The challenge now is to convert these agents to paying clients and grow the proportion holding OTM shares. We continue to model the group moving into profit and becoming cash-flow positive in FY21. On an EV/revenue basis, backed by DCF modelling, the shares have good potential upside.
Revenue for the six months to July was 2% up year-on-year, with the operating loss of £5.7m reflecting the heavier investment in marketing, as expected. The changes to our forecasts are primarily on the back of the adoption of IFRS15, which takes £3m off our revenue figures for both FY19e and FY20e, matched by a similar sum coming off the administrative costs (FY17 and FY18 are also adjusted). We have also taken a further £0.8m off our anticipated marketing costs for the current year in view of the success of the campaign to date. OTM had cash of £24.3m (no debt) at the half year and our modelling suggests net cash of £10.3m at the year-end, with £1.7m at end FY20, after which we expect the group to move into profit.
The first phase of the strategy has been agent recruitment and this has gone well, as shown by the branch numbers. With the prices charged by more established portals still moving ahead and the fundamentals of the agency market challenged on a number of fronts (falling commissions, tenant fee bans, Brexit uncertainty etc), OTM’s proposition has been attractive. The emphasis now shifts to building deeper engagement with the agencies ahead of end of the free-listings periods.
The shares are trading at 4.1x forecast EV/revenue to January 2019, compared with Rightmove at 16.2x (8.1x average for a broader global peer set of property portal businesses). We have also modelled the DCF, based on a WACC of 10.2%. This derives a value of 332p per share (was 355p) but, given the potential variability of outcomes, we would suggest an execution risk discount of 30% would be appropriate, indicating a price of 232p.