Small Cap Value Report (28 Jul 2017) - G4M, RMV, QUIZ

28th Jul '17 by Graham Neary

23 comments 11327 reads

Hi there! It's Graham reporting for Friday.

£G4M (StockReport)

Share price: 714p (-13%)
No. of Shares: 20.9 million
Market cap: £149 million

This has been heavily covered by Paul over the past year or so, but I will pitch in here with a few comments on today's trading update.

Performance for the year to date is in line with expectations.

But the shares are off for a reason, or perhaps multiple reasons.

Given the track record of exceeding expectations, perhaps merely being "in line" isn't good enough anymore?

There is no getting away from the fact that the share became very highly rated by any standard valuation measure, in comparison with short term profits.

And now those short-term profits are going to impacted by upfront costs associated with the growth plans.

These comments might have been received in a calmer way by investors in a share at a normal valuation:

As previously outlined, the current financial year is expected to follow a more typical seasonal trading pattern, with a higher proportion of sales and profits being generated during the second half of the year than was the case in the previous year.

Also, as previously notified, the first half of the current financial year will include the costs of embedding our new European distribution centres and setting up our recently acquired Head Office in York. Based on the overall performance of the business during the financial year to date, the Board is confident of another year of good progress."

Without applying any great leaps in logic, they are telling us not to expect very much in H1.

Edit: Last year's H1 was profitable to the tune of around £1 million in PBT, but now we know that this year's H1 is going to be affected negatively by more seasonality and by one-off costs.

I am not as familiar with G4M as my co-writer but I'd be very cautious about considering this for a long-term investment at the current share price.

EPS forecasts have been adjusted lower as follows:

Rightmove (LON:RMV)

Share price: 4293p (+0.3%)
No. of shares: 92.3 million
Market cap: £3,960 million

Half-year Report

This property portal is well above our market cap remit here,…

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Ramridge

28th Jul '17

Today's IPO £QUIZ seems to have got off at a gallop. As I write the offer price is 198p against a placing price of 161p, around 23% up. Paul covered this extensively a few weeks back.
Worth it? I am sitting on the fence.

Laughton

Today's research note from Edison:- http://www.edisoninvestmentresearch.com/research/report/gear4music/full

Julianh

There are quite a few problems with G4M's trading update today:
* no hard numbers for revenue or profits (see bestace above) or in fact anything. This is strongly in contrast to the more detailed trading updates we are used to from G4M
* a suggestion that this year will be more strongly H2 weighted. As Paul keeps reminding us, statements that all will come good in H2 are often precursors to a profits warning (when it doesn't)
* lots of additional costs to be justified by hoped for future growth
The difficulty, of course, is that it is very difficult to get a clear picture from this trading update. It could be the first sign of slowing growth and profits. Or it could be a foretaste of investment that accelerates growth. And maybe management have given the analysts a clearer steer, in which case we could trust the optimism of the Panmure analysis provided by dgold above.
In the absence of a clearer picture I have reduced my holding, taking a good profit in the process (even at today's lower price)

kenobi

The problem with rightmove is, where does it go from here ? how much further can it push up rates ? before agents start turning to alternatives (not as good admittedly),
The big option left to them is to take private sales at 500 quid a shot or so, but the large chains are large shareholders, will this be possible ? It's probably inevitable since they were forced to allow, non agents to list, (people like purple bricks),
great company, great business, how much more can it grow ? is it planning overseas expansion ?

K

WhaleHQ

Of course you're right they're probably masking something but why delay the inevitable? Numbers are going to have to be provided at the half year in September.

prem14

Hello Graham, what do you make of the trading update from TP Group today? Wonder why they don't mention whether they will be break-even this year? Thanks,

bestace

Yes Rightmove (LON:RMV) is clearly a high quality company but it's so dominant in its market share that I wonder where future growth will come from. There were a couple of interesting snippets on this in their last annual report:

We expect that the majority of our growth will continue to come through product penetration, pricing and innovation. We also continue to develop a number of smaller adjacent businesses such as advertising overseas and commercial properties and providing property related data and valuation services

Average revenue per advertiser (ARPA) growth will continue to be driven by increased product penetration, pricing and innovation...To put the immediate advertising opportunity into context, the ARPA for newspapers in 2007 was circa £2,500 per month compared to our 2016 ARPA of £842 per month and this is before we consider further growth in marketing spend and the business efficiencies that customers gain from using Rightmove.

So they're suggesting their customers are paying less and getting more than they were in the pre-digital age, and therefore there is plenty of scope to continue upselling to them.

I wonder if their customers would see things the same way. I'm not sure onthemarket.com would have been set up if their estate agent backers were happy to keep shelling out more and more to Rightmove.

So perhaps overseas expansion is the answer? It feels like they are not really pursuing that avenue as hard as they could be.

janebolacha

£G4M did actually trailer in their last final report ( http://www.stockopedia.com/share-prices/gear4music-holdings-LON:G4M/news/rns/170509g4m5308e.htm/?title=final-results ), in the CFO's commentary, that profit growth this year was likely to slow. I sold just after this report, precisely because of this comment:

"Recurring administrative expenses increased 51% compared to the 58% increase in revenue as the Group invested in European Distribution Centres and its people. These investments are central to delivering the Group's strategy and critical to medium and long term prospects. As referred to in the Chief Executive's statement, there will be an initial 'overhead investment' phase involving upfront additional costs being incurred that take time to generate added value. These costs will be evident in H1 FY18."

Re Rightmove (LON:RMV) With its dominant position and fantastic metrics, I have been frustrated by the seemingly lack of SP growth over the years. A brief glance at the SP chart shows that growth over the past 18 months has been a miserly 4.5%. Why such a near flat performance?

sminers

I believe the 'in line' part of the rns speaks to that. Directors also participated heavily in the raising which is good news imo

Graham Neary

Hi Ram, thanks for pointing that out, I've included it in the report now.

Cheers

Graham

peterthegreat

When I was carrying out research for an investment in Righmove a couple of years ago I remember reading somewhere that Righmove's revenues can vary a little depending on how prominently it appears in Google search results. This sensitivity got me thinking that if Google decided to expand into this area then they could destroy the Rightmove business quite easily by ensuring that much lower prominence was given to the relevant searches. This is one of the things that impressed me about the strength of Google's business and is why I ended up investing in Alphabet. rather then Rightmove. Rightmove is a brilliant business but I am sure Google could destroy it if Google decided to do go into competition and do a deal with estate agents. However, it is quite possible that this might not make economic sense for Google, but it is something to consider.

Peter - how many 2.4bn euo fines do you think Google will want to invite?

WDWombat

the comments on G4M - which I do not own - are just plain wrong. Interims last year were profitable on both reported and adjusted basis, exact;y the same in fact at PBT £966k and NP of £750k reported. There are no references to actual valuations as opposed to assumed ones. On many counts, given the nature of this business, the share can be regarded as being at a deep discount to the 'internet' retail group including Purplebricvks and BooHoo. This is not a view but a fact.

but I do own it now

Thanks for the correction on last year, I have corrected it. The adjusted and reported were indeed the same. Cheers

MikeBrenner

A bit of a ramble but may be of interest when looking at Rightmove and Purplebricks (LON:PURP).

I work in a different segment (travel) which has intermediaries offering the same type of service as Rightmove to aggregate content, compare prices and help customers make the choice on what they want before booking elsewhere (think Tripadvisor, Trivago, Skyscanner, Kayak etc ..). The difference is that in the travel industry there are many more enabled online players be it suppliers or travel agencies able to lean into these channels e.g. Booking.com, Expedia, Hilton, easyjet etc .... and they are happy to pay for clicks (CPC) rather than just pay a listing fees. Reasons below

The main concern for Rightmove should be that 75% marketing share with a "listings commercial model" works when you have a hugely fragmented marketplace of estate agents who either can't build scale to build their brand to generate own direct traffic to their own sites or the marketing technology / muscle to lean into marketplaces like Rightmove in any other way so the fixed model of paying for listings works as its a default marketing spend they need to drive customers.

The likes of Purplebricks (LON:PURP) have proven that a) they can build a brand and drive direct traffic offsetting their marketing channel mix b) are capturing an ever increasing share from the Rightmove marketplace as they understand their marketing attribution, test & learn data and value per customer better c) are now working direct with developers to sell their properties / let their new buildings which reduces the traditional reliance on always using Rightmove.

PURP will become an ever increasing customer concentration risk and they will start to make capital allocation trade offs with their marketing spend that will force Rightmove to enable them to move over time from a "listing / subscription" model to a CPC model if they want to capture more growth (this won't be coming from high street agents!). Rightmove will do this just like Tripadivor and the others have done, as it will enable them to capture a greater amount of $£ from the marketing budgets of the likes of PURP who can then allocate capital more efficiently to their marketing channel as they grow. They will potentially face great risk in this transition from a listings to a bidding marketplace and it will open up opps for other players to enter the same space that Rightmove is in as they will see that the size of the market, and the tech challenge / commercial model opp makes it a worthwhile bet!

Note that if this feels to futuristic and long term ... Trivago was a small German start up 7 years ago, who have enabled a travel marketplace that the marketing budgets of the online accommodation players can bid and spend in more efficiently (CPC) which enabled it to rapidly allocate capital to build its own brand ... recycle and repeat and its now generating $1b over the last 12 months and generates more revenue from hotels than Tripadvisor (who has been moving from a listings to a CPC bidding commercial model with difficulty the last 7 years!).

I would expect this to happen first in the USA where there are more well funded online players like Redfin, but it will be the case in the UK too, In the future the outdated model of paying an estate agent a fee upfront and not being able to easily sell your home through other agents will go away for a large portion of property transactions (sell or let) ... a customer will enable any agent to sell their house, and then one who sells it will be the one who gets paid. Again the likes of PURP would then create even more disruption to the economic models of the estate agency business.

All IMO of course ... which provides both opportunity and risk for Rightmove!

Hi peterthegreat - I agree.

What google is waiting for are more suppliers (think PURP, REDFIN not the traditional estate agents) who have variable marketing budgets that can both scale and lean into online / mobile marketplaces. Once a critical scale is established then its a no brainer for them to look at it. The questions is always focus and can a segment specialist do better - plenty of examples where segment specialists beat google like Amazon, Trivago etc ... but rare!

Rightmove will face increasing marketing risk in how they bring traffic to their sites as the online estate agency players like Purplebricks (LON:PURP) improve their ability to compete for SEM keywords and generate greater unique content to compete in SEO rankings in Google. This should become more evident over the next 12-24 months with increased marketing costs for Rightmove and / or slowing traffic. Google of course will be making more money here too as the market expands hence why an investment in Alphabet is a good idea :0)

Nothing in any law stops google competing and creating a better experience for customers that saves them money and makes their lives easier ... it just has to get the balance of how it manages its search marketplace that potential competitors operate in better to manage the regulatory risk.

staverly

29th Jul '17

Would be useful to know what metric(s) PG base their TP on ...

Small Cap Value Report (28 Jul 2017) - G4M, RMV, QUIZ

£G4M (StockReport)

Rightmove (LON:RMV)

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Graham Neary

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