OnTheMarket plc (LON:OTMP) is the topic of conversation when Zeus Capital’s Research Director Robin Savage caught up with DirectorsTalk for an exclusive interview.

Q1: You’ve published today a 28 page note on OnTheMarket, can you tell us what the key points are?

A1: The note summarises the company’s achievements in its first 11 months as a listed company.

So, the first achievement is that it’s increased its network of estate agency offices using it from 5,500 to over 12,000 offices. It’s done it two ways, one is by recruiting key agent groups to sign long-term contracts agents and two, by offering the first year free to around about 6,000 offices.

Secondly, it’s increased its brand value, measured by the google ranking and the quality of leads given to its agents, and this has been the product of increased marketing spend.

The third thing is that it’s started to convert the first year free agents, in December it converted 60 offices to paying contracts, full tariff paying contracts.

My forecasts for the next few years assume two thirds of the first year free agents convert and the average typical tariff is something like £350 a month and by the winter of 2019, I expect OTMP will be profitable on a monthly basis.

Q2: The 31st of January is OTMP’s financial year end, what can we expect in the form of a trading update?

A2: I expect their year-end pre-close update will confirm the number of offices, I expect it’ll be close to our forecast of 12,500, that’s the number of offices using the portal.

Secondly, the number of agents that have moved to full tariff from first year free, I expect that will be still a double-digit number, I mentioned in December that 60 had moved.

The number of leads generated continues to rise year-on-year, you’d expect that given the increase in marketing spend, and the cash balance left at year-end after the recent marketing campaign, my forecast assumes around £14 million.

Investors should note that the majority of the company’s revenues are contracted on a multi-year basis and with £14 million of cash, contracted revenue of over £14 million per annum, the portal is well funded for the next 12 months or so.

Q3: Just talking about investors, how can they judge the value of OnTheMarket’s shares?

A3: Well, share prices reflect not just the expected investment returns but also the market for a specific stock, the number of buyers and sellers so we’ll first deal with the investment return and then we’ll look at the market.

We see three steps to OTMP shares trading on a traditional Price Earnings Ratio which reflects future investment returns:

• The first thing is it’s got to build its network of estate agent offices to over 12,000 which is what it’s already done.
• The second step is converting the first year free agents to full tariffs, so it really needs to get over 10,000 paying offices in order to breakeven.
• The third is building that revenue stream so that there is an attractive profits stream coming out so that will be through the provision of additional services and increasing subscription rates by under 5% per annum.

The whole point about OTMP is that over half the shares are owned by estate agents, that it will be thinking of these estate agents as being a genuine partner in the whole process and that the pricing is going to be at a sustainable and appropriate level which certainly compares to its competitor Rightmove.

Whilst the company is building its revenue stream, I think it’s sensible to value the shares on a price to revenue or a price to office basis as this is effectively looking through to the period when it should be making profits.

I expect the company’s revenue in the year to 31th January 2019 to be in the order of £14.5 million, in the first half of the year let me remind you that they generated £7 million so £7.5 million with the additional paying agents that were contracted in the first half and some contributing in the second half. The annual revenue that would come from converting agents with nearly 5,000 first year free offices could be annualised at something like £21 million.

Our forecast revenues for the period to January 2020 is £28 million, reflecting the conversion of two thirds of last year’s first year free agents. By 2020/21, it ought to be able to deliver a respectable EBIT margin of say 30% on a revenue base of let’s say £67 million and that would result in a valuation which could well £300 million or about £3.00 a share, which is 4.5 times revenue and £18,000 per office.

Now, compare the £18,000 per office to what it is at the moment, at 80p a share, it’s trading on about £4,000 per office which is clearly low compared with Rightmove which at its IPO was valued at £60,000 per office and is now valued at £230,000 per office.

So, I expect OTMP to make a series of announcements this year as its revenue stream grows. In terms of the buyers and sellers, exhibit 22 of my research note shows the volume of buying and selling at different prices and you can see clearly, for the market that’s mentioned, that the volume weighted price last year was 143p, compared with 83p now. There’s very little amount of stock being traded below £1.10 suggesting that buyers in any significant volume would need to pay over £1.10 to get stock. So, what I would suggest is that if there were any serious institutional interest in OTMP, you could see a very sharp movement because there may not be enough stock around.