Within the next few weeks we should see an interim results announcement from Onthemarket (LON:OTMP) – they will not look good.
Masses of losses, despite a much greater revenue, an apparent widening gap into the red – on the face of it they could be described as ghastly.
However, as I look at it, this company is in the right place in its development to show early stage investors a massive buying opportunity, offering them significant upside.
Way back in early 2013 a group of estate and letting agents set up a company called Agents’ Mutual.
Its purpose was to create a challenger to Zoopla and Rightmove as an online property portal. The aim was for this new portal to charge agents much more competitive rates for using their site.
The idea was very well received and other agents joined in as its potential became apparent. Several of the leading independent agents even made available the funding for the venture, by way of loan notes and a commitment to use the portal when it went live.
It launched two years later, boasting a host of properties available through some 4,600 agency branches.
Its development progress was steady but impressive, such that by February last year Onthemarket went on to the AIM market, by way of a £30m Placing. By that stage the company’s equity was some 70% owned by over 2,000 agent firms.
Even more impressive was the fact that, at that time, the portal had around 5,500 listed agent branches, whilst it displayed well over 30% of the UK residential property listings.
Over the next year the business grew substantially in size, by January this year it had grown to having listing agreements with firms that had more than 12,500 branches.
It was then receiving more than 23.5m online visits each month and was producing over seven times the number of leads for its agent customers. By May that number was beaten by a new monthly record of 25.4m hits.
By early June there were more than 650,000 listings on the portal.
This rapid pace of growth has cost a lot of money to date, especially as it expanded its operating infrastructure, now with 105 staff. At the same time the marketing spend has exploded.
In the year to end January 2019 the company reported revenue of £14.2m and a pre-tax loss of £13.6m. Its administrative expenses leapt from £9.7m to £27.8m, which included a big increase from £2.2m to £14.9m in marketing spend.
That expenditure covered big campaigns, not only digitally, but also on national radio and television stations. This has been the base of the current multi-millions of monthly visits to the portal.
It is already a success and is now an accepted challenger to Rightmove and Zoopla, it is clearly the number three player in the market.
Now it is set to turn that success into profits.
Estimates suggest that the company’s revenue will more than double this year to end January 2020, to some £28.5m, which should help to see a much lower pre-tax loss of just under £10m.
But next year will witness a very big difference in the company’s financial appearance, with estimates of almost doubled revenue again to £55m, turning around from losses into a much heathier £8m pre-tax profit, worth about 10p per share in earnings.
Further out I do see revenues and profits increasing exponentially. But for the time being I am just going on what brokers are suggesting for sixteen months out.
The company has 63,746,913 shares in issue, of which estate agencies are still the largest grouping as shareholders.
Institutional holders include Schroders with 5.7% and Albert E Sharp with 2.96% of the equity.
An individual shareholder, Jason Walker, owns 2,608,484 shares, representing 4.1% of the company.
When the company announces its interims in a few weeks, it is not so much the figures that will interest me as opposed to the accompanying statement of the company’s progress in the six months to end July, together with balance year aspirations.
The shares, which peaked at 176p in June last year, fell away to a low of 82.5p by January this year.
Now trading at 96.5p, they are on less than a 10 times prospective price earnings, that is a very low rating considering its growth potential.
Encouragingly brokers Peel Hunt are rating the shares as a Buy with a Target Price of 350p.
I feel safer in going for the shares recovering to their previous peak within the next nine months, before they then reach out for a much higher and more reflective price.