Hardman and Co Analyst Mike Foster caught up with DirectorsTalk to discuss Purplebricks Group PLC (LON:PURP)
Q1: Now Mike, we’re talking about Purplebricks Group today, can you tell me what the one key driver to Purplebricks’ successes?
A1: Yes, we just published a note and they’ve had their AGM today, one driver is simple, first-mover advantage is an online hybrid agent, other online agents are doing this mix of online and actual agents but Purplebricks has got 70% market share just of the online guise. So basically what happened in the US and the UK is that the early online model, to be frank, failed, that’s because it was online only there was no human touch, Purplebricks is much more than human touch, it’s all about the human expert being more not less in control, all their technology is there to make him a 24/7 multi-tasking guy and the clients like it.
Q2: So how has trading been post-Brexit?
A2: It’s been good, as I say the AGM was today, we had a statement and they’re still growing both in absolute terms, very very few, I don’t think any, estate agents in the UK are doing that, and so certainly in market share terms they’re growing very significantly post-Brexit and indeed pre-Brexit.
Q3: Now there must be some risks to this model, what are those?
A3: There are, given the first-mover advantage the risks are much lowered but we’re assuming that this model, which we think is a great success, will get a 10% only market share of UK estate agents sales. In a way that’s being conservative but there’s obviously going to be other people coming along trying to copy them for example Rightmove had the first-mover advantage then Zoopla’s come along later but Zoopla has managed clearly to still carve out a share. So we’re trying to say that there will be a market share around about 10%, could be more but we’re not wanting to get too carried away because if it grew too fast then companies are in danger of tripping over themselves. As of today, more so it’s a loss making company, they’ve got plenty of net cash in the bank but they aren’t making money right now and media spend to keep visibility up, you see it on your TV screens, it’s about £1 million per month in the UK alone.
Q4: Now there were losses this year, is that a result of the advertising or did something go wrong?
A4: They have a high spend model to get that visibility and take advantage of their first-mover advantage but what’s also happened is that it was only launched 2 years ago in the UK and the UK is just about going into profits now which is right on budget but Purplebricks Group launched in Australia a couple of months ago and as per the UK a couple of years before it goes to breakeven and about £10-£11 million of losses budgeted in to get to that position. It’s an investment really, primarily in that media spend and training the agents but the fact that they have opened in Australia a couple of months ago does mean that they’re making bigger losses because of that. So it’s happening in Australia and it’s happening at least as fast as the UK which was launched property in 2014, the UK will break into profits in 20147 as planned, despite Brexit, but Australia is coming on stream now. One risk that we’ve seen also in looking at the share price is that it is, or has been, quite volatile, it is a new concept, we can see it working well because they’re gaining market share and growing, but it is a new concept and also the free float is low.
Q5: What is the upside, what market share do you model and what might they achieve?
A5: As we say, we think 10% of the UK, to be clear they’ve got a toehold in being a letting agent, we are assuming a small amount of income from that in the coming years but we’ll revise our views once they’ve really got traction in that. So the model really is currently that but primarily estate agents, we model a 10% share of the UK and also launched in Australia we see no reason why they shouldn’t get a 10% of the Australian market as well. That is 10% of transactions, currently it’s about 3% of UK transactions by the way two and a bit years after launch which is not bad at all and it’s the fourth biggest UK estate agent by transactions. So that’s in transactions, in pound notes it’s less, the Purplebricks vendor pays on average 70% less than the high street agent user so if you’re looking at a share of the pound notes of the clients we see it going to much less than 10% so we think that’s very achievable, in fact we think that it will materially affect prices that the high street agents can charge. The 10% is kind of a nice round number, let’s be clear we’re guess really, we think the potential could be much higher than that and we think the high street agents will lower their cost somewhat but actually we think that they’ll focus more and more on lettings. Purplebricks has got a toe in the water there too but I personally think that the Purplebricks model is primarily for sales with a bit in lettings whereas the high street agents will be much more in lettings and a bit in sales.
Q6: You motioned Australia, how much does that help profits opening up there?
A6: So it’s got this £10-£11 million losses first couple of years but we think that the potential there is that the addressable market is about 75% the size of the UK’s. Clearly Australia is a lot smaller than the UK but house prices are higher, agent’s charge even more there in percentage terms so as I say we think that it is actually three quarters the size of the UK.
Q7: Now the engine is the LPE’s, can you explain what the LPE’s are and what’s happening there?
A7: So a bit of jargon, the local property expert, it’s an estate agent to you and me but what they’re trying to highlight is these are experts, these aren’t trainees, they are trained experienced high-performing agents in normal traditional estate agency terms. They’ve gone over to Purplebricks to get a much higher number of successful sales albeit they obviously get a less pound note income per property, that’s the whole model that Purplebricks Group charges much less than the high street agents but because of the technology each agent can do a lot more. So the agents overall see a boost to income and these are high performing guys coming across, they are franchisee estate agents and by the way they pay nothing to buy the area franchise. We talked earlier about the upside and also the risks, the LPE’s are the big driver but there are also the key to the whole thing so might they leave the business, as franchisees come and go, at the moment they’re joining in very significant numbers, LPE numbers rising is to plan, we don’t see them leaving. The real risk is actually training and rushing things, these guys need to and are getting in-depth training, and some of the existing franchisees are being rotated off the front line into the trainer mode for a short while which makes that training programme more robust. So the LPE’s really are the engine to the whole thing, they are the risk if Purplebricks was to go too fast and not train people up properly and they are the guys that actually are sorting out that problem, they are training it’s not just people who are coming in from outside the industry, you’ve got experts who are training experts to go out there in the field for Purplebricks.
Q8: What is the cash flow profile?
A8: It’s negative, they’ve got substantial net cash held, they obviously raised a far bit of money in the float late last year, the cash flow this year is minus 5.8 on our research note but that even with the Australian outflow turns to £7 million positive inflow next year and £27 million inflow the year after. By the way, 5 years from now, I think investors do need to look at medium term distance for a new disruptive concept like this, 5 years from now we estimate 26p per share being the annual free cash flow so that’s a really high free cash flow yield, it’s 5 years out.
Q9: Now you were talking earlier about free float, what is that and why is it an issue here?
A9: Just under 80%, about 76% of the shares are owned by the founders and close associates, there’s 3 very large founders, shareholders and the Chairman and close associates include investors who’ve backed them from a very very early stage pre-float, Woodford Funds and others. So few shares get traded in the stock market and that of course does tend to raise short-term stock volatility which we’ve seen, the share price has been up and down, but it’s well above the price at which it floated.
Q10: How do you value these shares then?
A10: It is a disruptive concept, it’s not yet profitable but turning into profits in next year. We kind of compare it to Rightmove really because it has got some similarities, in the same industry, technology driven, disruptive and Rightmove’s market cap is in a significant multiple of that if Purplebricks so how do you sort of finesse that? We look at the rating of Rightmove currently and we think that Purplebricks Group in 3 years’ time will be on a similar ratings and that would actually give a share price of £4.20, this is looking at the multiple of the share price to earnings per share. So that’s a starting point, we think that in 3 years you’ve got a rationale for the share price, if you think that the Rightmove share price is correctly rated and we think it’s about right, would give the Purplebricks share price a bit over £4 in that time horizon so that’s not now, 3 years from now and it does hang on our estimates of how Purplebricks will progress in the coming 3 years so it’s not a current share price target but that does give a substantial multiple of the current share price.
