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We downgrade ZPG to a Hold (from Buy) with a 490p Target Price (from 460p). ZPG is trading essentially at its bid price of 490p and, as we do not expect any counterbids and the Silver Lake bid to be approved, there is currently very little upside to the shares.
ZPG
ZPG Flash : Q1 on track, OTM and SVT up next
ZPG : Q1 on track, OTM and SVT up next (30-Jan-2018)
ZPG Flash : Unreasonable growth at a reasonable price
The Competition Appeals Tribunal decision has decided in favour of OTM’s ‘one other portal’ rule. We are surprised by this, and see it as a small negative for ZPG (and a small positive for Rightmove). OTM is now promising to return with increased marketing spend and “substantial new plans” for the portal which it expects to implement from the end of August. We make no changes to our ZPG estimates, and would see near term weakness as a potential opportunity to get into a group which continues to have a very strong long term investment story - including the eventual recovery of lost market share from OTM.
ZPG’s next scheduled update is a pre-close due late September. We maintain our top-of-the-range estimates following recent industry developments which broadly appear to be moving in ZPG’s favour. At 25x EPS / 17x EBITDA the shares are clearly not cheap, but the premium valuation looks well underpinned both by strong long term growth prospects (the best among the ‘portal’ stocks in our view) and our growing confidence on near term trading.
Interim results look solid overall, with revenue 4-5% ahead of forecast for both property and comparison services, profit at the top end of expectations, and a 27% increase in the H1 dividend. We do not expect full year estimates to shift materially. The stock has dipped 9% from recent highs, and may show a small bounce on these numbers. We continue to like the long term story at ZPG, but remain Hold for now, awaiting a better entry point given near term trading pressures we see for both the property and switching parts of the business.
The Zoopla story continues to develop apace, with the announcement of the £120m acquisition of Hometrack, a leading property data services company in the UK and Australia. The acquisition is not cheap at 14.7x EBITDA, but looks like a great fit strategically, with the price tag justified by a strong growth track record plus clear potential revenue synergies. Our initial view is that the deal should add c3% to EPS, further differentiates Zoopla’s investment case relative to Rightmove’s, and should be taken well by investors. Call at 0900.
Ahead of an update expected from the company this Thursday, we refresh our estimates to reflect strong FY16 results and recent reassuring indicators on the UK property and energy switching markets. The near term risk from a weak UK property sector look to have dissipated, while the long term growth story remains impressive (we estimate EBITDA CAGR of 14% pa for the next five years, with several areas of potential upside to this estimate). We move up from Sell to Hold. Valuation-wise, we’re still not sure it’s a smart time to buy, though. The stock has run up strongly and is now a consensus Buy (9 buyers, 8 holders, zero sellers according to Thomson Reuters). SOTP analysis, valuing property in line with RMV, and uSwitch at a 30% premium to MONY, still only gets us to 350p/share - 5% below the current price.
Post-Brexit we have moved Zoopla from Buy to Sell, and now add it to our Conviction List. The shares have already been rocked by the Brexit vote, but we think they have further to fall. Its estate agent customers, already under pressure from slowing transaction volumes and new online competitors, now face a prolonged period of market uncertainty and lower volumes. OnTheMarket’s continuing presence constrains Zoopla’s ability to respond to a downturn. uSwitch offers some offset, but is likely to be flat in the near term. Our estimates are 15-25% below consensus, reflecting our expectation of significant consolidation in the UK estate agency sector post-Brexit.
The shares have already been rocked by the Brexit vote, but we think they have further to fall. Its estate agent customers, already under pressure from slowing transaction volumes and new online competitors, now face a prolonged period of market uncertainty and lower volumes. OnTheMarket’s continuing presence constrains Zoopla’s ability to respond to a downturn. uSwitch offers some offset, but is likely to be flat in the near term. Our new estimates are 15-25% below consensus. We move from Buy to Sell with a Target Price of 225p (360p).
The shares have already been rocked by the Brexit vote, but we think they have further to fall. Its estate agent customers, already under pressure from slowing transaction volumes and new online competitors, now face a prolonged period of market uncertainty and lower volumes. OnTheMarket’s continuing presence constrains Zoopla’s ability to respond to a downturn. uSwitch offers some offset, but is likely to be flat in the near term. Our new estimates are 15-25% below consensus. We move from Buy to Sell with a Target Price of 225p (360p)
Zoopla metrics for April-July were significantly stronger than we had expected, with agency branches returning to net growth in the period April to July, and inventory and traffic levels holding up well. We do continue to see longer term risks – around OnTheMarket's longer term impact, uSwitch earnings volatility, and stock overhang. We would highlight that Zoopla is still losing branches to OTM on a net basis (albeit tiny now) and that share of consumer traffic has deteriorated since the launch of OTM. Near term though, OTM's growth appears to have stalled, Zoopla's inventory and traffic are holding up pretty well, and the UK housing market looks to be picking up. We think the stock could continue to push higher in the near term, and move from Sell to Buy with a new Target Price of 360p (from 195p) and higher long term EPS forecasts.
Ahead of a trading update this week, we have refreshed our estimates to reflect the uSwitch acquisition. They emerge close to consensus, and our Target Price improves from 130p to 195p. Nevertheless we remain cautious on the stock. Near term we can see the shares may do quite well: the battle with OnTheMarket appears to have stalled somewhat, housing transactions are picking up post the Election, and the utility switching market remains buoyant. Longer term though we see ongoing challenges – around the eventual impact of OnTheMarket on Zoopla's property business, the impact of falling energy prices on uSwitch, and the c43% potential stock overhang held by DMGT and agency groups. Valuation post uSwitch looks better, though still demanding at 15.1x ebitda / 20.3x EPS (calendar 16E).
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