Why I'd still buy this surging property stock despite the slowing housing market
The share prices of most of the UK's largest listed homebuilders dropped like rocks this morning as investors once again grew nervous about the state of the UK property market. But even with this sell-off fresh in the news, there's still one property company I'd happily buy today.
That would be none other than the UK's dominant online property portal Rightmove (LSE: RMV). My reasoning is that while we can't know when exactly the recent property boom will slow down, Rightmove is still a great business to own for the very long term.
This is because, for many house hunters and sellers, online portals are often the first port of call these days. And with a 75% share of this market, Rightmove is more often than not the biggest beneficiary from this trend.
And the company's management team has leveraged this great market position into a business that kicks off cash at extraordinary levels. In the half year to June 2017, the group's revenue rose 11% to £119.5m while underlying operating profits rose by the same amount to £91m.
After deducting taxes and tiny upticks in capex and working capital, this left a whopping £72m that management distributed in whole to shareholders via £42.5m in share buybacks and £29.5m in dividends.
Furthermore, while a downturn in the property market certainly wouldn't be a boon for Rightmove, it also wouldn't be disastrous. This unlikely defensibility comes from the company's critical importance to estate agents, who know their customers want their properties listed on property portals and have to pay a monthly fee for this service. And as Rightmove adds on ever more services, the fees it extracts from agents continue to rise, up 10% in H1 to £911 per month per agent on average.
Although Rightmove isn't dirt cheap at 28 times forward earnings, this cash-rich, high-margin, fast growing business is still one I'd be comfortable buying today and owning for the long term.
Big Green Profits
One growing property business trading at a much lower valuation is self-storage firm Big Yellow Group (LSE: BYG) whose shares trade at 22 times forward earnings. And although the housing market may be entering the doldrums, it's unlikely that cash-strapped young people will be any closer to stepping on to the property ladder in the next few years.
That's good news for BYG since people living in tiny flats are much more likely to need self-storage spaces to store their excess belongings. According to BYG's Q3 results released this morning, the trend appears to be continuing as strong as ever. In the first nine months of the year, occupancy rates at the company's outlets increased from 75.5% to 80.1% year-on-year.
As demand for its units has increased, BYG has also found success in raising average rents, which led to revenue for the nine months rising 6.7% to £87.7m. The results didn't contain any profit updates, but for the first six months of the year the group recorded £30.6m in adjusted pre-tax profits from £58.1m, which shows just how profitable running highly automated self-storage outlets is.
With bumper profitability, space to expand in the North of the country and demographic trends in its favour, Big Yellow Group is certainly one stock to keep an eye on.
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Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has recommended Rightmove. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.