The UK's challenger property website Zoopla heads for an IPO

by Alistair Helm in


Banners_and_Alerts_and_working_file.png

The property portal space in the UK keeps getting more interesting as the #2 challenger in the market Zoopla signals it's decision to float as a public company. The changing competitive landscape in the UK portal space as well as the approach to the IPO is interesting and has pointers for the NZ market - here are some of my thoughts

The UK real estate market is in many ways very different to New Zealand. For a start the structure of the industry, offering a different degree of service and a lower commission fee structure of around 1.5%. Equally the process of purchase (certainly in the England) is a lot more tortuous with the system of accepted-offers on property purchases amounting to no more than an intention to buy right up until the settlement date when as a buyer or seller you get to know if the process will all go through.

When it comes to marketing of real estate the landscape is also somewhat different. Firstly the industry has moved almost wholly to online with the dominant player Rightmove growing into a highly successful and valuable company.  

Rightmove was founded in 2000 by the top 4 real estate companies as a free to list service, fully industry owned. The site and the business grew in size, relevance and value as firstly subscription fees were introduced in 2002 and then premium advertising products in 2007. In 2006 the founding sahreholders decided to float the company with an IPO which listed the company on the London Stock Exchange in March of that year at a initial price of  £3.35 valuing the company at £425 million. The IPO raised £76 million representing 18% of the company with the balance retained by the founding shareholders.

Over the following 8 years the company has grown in scale and financial performance from revenues of £18 million to over £140 million (an increase of 670%) and at the same time the value of the company has grown to over £2,360 million ( an increase of 450%).

At one time around 2009, Rightmove seemed to have the market sewn up as the competitive threat was fragmented with competing sites such as PropertyFinder, PrimeLocation and FindaProperty as well as innovative property information sites like Globrix fighting it out for a weak number 2 position. It was through smart acquisition of these competing sites that Zoopla came striding through the market to become over the space of 8 years a real challenger to Rightmove. From the latest stats as measured by SimilarWeb the traffic to Zoopla is around two thirds of that of Rightmove with an estimated 16.7 million visits per month.

The financial backing for Zoopla came largely from The Daily Mail & General Trust the publisher of the same name which is still the largest shareholder in the company with 52.8% of the shares. Zoopla whilst not attaining anything like the revenue and profit levels of Rightmove (£38m in revenue and £10m in profits) has driven the business to create a very strong number 2 player in the market. Core to this success has been data around sales prices and estimated valuations. In very much the same model as Zillow in the US, Zoopla took public record data on property sales prices and mapped it on the site day one and this as with Zillow has delivered a valuable unique proposition for the company. Nowadays Rightmove and the other sites feature such data but back then the advantage was played well by Zoopla.

Zoopla has now announced its decision to undertake its IPO with an expected valuation of £1,000 million, providing a healthy return for its largest shareholder which has invested close to £80m in the business.

What is most interesting within the news of the IPO is the decision by Zoopla to offer a special share purchase scheme for its customers. The scheme available to existing customers of which there are an estimated 20,000 in the UK - real estate offices and property developers, is a two stage purchase of £2,500 each - one tranche now and one in a year's time. Based on a say a share price of £15, with say 23 million shares on offer, this scheme would over the two years if fully subscribed create a 10% ownership within the industry. A very smart move to tie-in their customers (something I have advocated for Realestate.co.nz in my recent strategic proposal).

To sweeten the pot Zoopla has announced that existing customers will get a 20% discount on the issue price, which they recon represents a discount of £20 million - a great gesture and one that I am sure will attract a significant uptake.

There is another reason for this strategic offer and intent to create a shareholder structure within the industry. Last year it was announced that a collection of real estate companies fed up with spiralling increases in fees and the perceived excessive profiting by these real estate portals (despite the fact that RIghtmove was started as an industry owned site) was going to create a new genuinely industry owned website to champion a fairer (lower cost) portal - sounds like a familiar situation to those in the NZ real estate industry battling Trade Me's fee increase?!!

What was very interesting in the announcement (and I personally do not believe it has much hope of success - have a read of an opinion piece I wrote at the time) was that the new site called Agents Mutual was going to require subscribers to commit to its site and only one other portal - saying to the industry, you choose Agents Mutual and Rightmove or Zoopla - but not both! - consider the influence of being a shareholder in Zoopla on this decision now??


Trade Me now free from the Fairfax shackles has significant upside potential

by Alistair Helm in


Investor Relations – Trade Me Group Ltd.jpg

This blog is primarily about property; the property market and real estate, although at times I allow my mind to wonder and consider and analyse related areas. This post is just such an exercise.

I followed with interest over the weekend the decision by Fairfax to sell down their remaining stake in Trade Me – in my mind a decision akin to “selling the engine to pay off the car loan" as I tweeted !

I think the winner is Trade Me, unshackled from its rudderless parents now free to demonstrate the online powerhouse it can be – the question though is how big could it be. Some of the recent articles have commentators pouring cold water on upside potential and sensing (judging) that its “trading position may not be so great”.

Now I should be very clear here, I am not a financial analyst, I do not own shares in Trade Me and I would not recommend, nor take anything I say hear as investment advice.

I do think Trade Me has a significant upside – the current share price is $4.02 as of today gives it a market cap of $1,591 million – a very healthy premium to the $700m Fairfax paid for the company in 2006. Some of the recent articles have speculated that the recent high of $4.45 back in late October giving the company a valuation of $1,761 million was a sign of the share price "running ahead of itself". I think in time the market cap could well exceed $2 billion in today’s money.

On what basis can I make such an assertion? I have simply looked at some benchmark companies in an area I know a lot about – real estate.

Trade Me Property is a very successful part of the company – it dominates the viewing of online property with over 1.5 million unique visitors a month and an average on sit duration of over 20 minutes. It's not a monopoly as Realestate.co.nz is very successful and holds a credible #2 position, however it would be a brave property seller in NZ today who did not ensure that their listing was on Trade Me Property.

Benchmarking the online property market is fairly easy and my two examples would be Realestate.com.au in Australia (Part of , well about 90% of the REA Group) and Rightmove in the UK. Both are listed companies and therefore publicly accessible information.

The Australian real estate market is more advanced in online than NZ, there around 30+% of media spend is online as compared to about 15% here, in the UK it is around 20% although the real estate market is less advertising focused as commissions are lower and this results in a lower media spend. Both of these companies are more succesful at EBIDTA margin than Trade Me delivering in the case of Rightmove 70% levels.

Using a very simple calculation method based on comparable populations and local currency conversion; the current REA market cap of A$2,289m equates to a NZ$557m real estate online business in NZ terms. Rightmove with a market cap of £1,523m equates to NZ$206m real estate online business in NZ terms. This reinforces the point made earlier about the powerhouse that REA is in the Australian real estate market. For this reason I have applied a weighting factor to arrive at a final weighted price for Trade Me with an up weighting of REA by 26% and a down weighting of Rightmove by 52%.

The table below summarises this data:

Trade Me benchmarking Dec 2012 #1.jpg

Whilst benchmarking, I examined two other specialist category sites in Australia, the listed Australian car trading site of CarSales.com.au and the recruitment site of Seek. Both are dominant players in their respective categories and thereby provides a category benchmark for both Trade Me Motors and Trade Me Jobs. Trade Me dominates the NZ car sales market, and is fighting a strong battle with Seek in the jobs market. The current market cap of CarSales.com is A$1,754m which equates to a NZ$427m car sales online business in NZ terms. I see CarSales.com.au as very similar in its sector as a benchmark to REA Group and therefore have developed an up weighting of 12%.The current market cap of Seek is A$2,343m which equates to a NZ$570m jobs online business in NZ terms. In principle whilst Trade Me is not as dominant as Seek in jobs there is no reason to down weight it's representation in evaluating a weighted valuation for Trade Me so I have up weighted it by the same 12%.

Now to determine how each of these sector specific benchmark companies contributes to an overall estimation of the value of Trade Me I have examined what I see as the current split of business between the core sectors of Trade Me – Property, Jobs, Cars and Classified / Retail. At this time I see the split as 16% for Property, 10% for Jobs, 29% for cars and 45% for classified. In future I see this changing. The future representation is also shown in the table below.

Trade Me benchmarking Dec 2012 #2.jpg

To come up with a overall calculation for the value of Trade Me I have taken the future split of business and applied this to the sector benchmark valuations to then come up with an overall valuation of just over NZ$2.3 billion based on the weighting. It's not the most scientific analysis but I think it is interesting.