Q&A with Mike Foster Analyst at Hardman & Co

Hardman and Co Analyst Mike Foster caught up with DirectorsTalk for an exclusive interview to discuss Purplebricks Group Plc (LON:PURP)

 

Q1: So we’re talking about Purplebricks who have just IPO’d today, if I can start by asking what is a hybrid estate agent?

A1: Purplebricks Group is the first one to market in this new format and we think that they really have got not only the first-mover advantage but really it would be very difficult indeed to copy this. It’s online based but it very much is built on a platform with local property experts. It’s a national business, a national estate agency and there is more a mix of market-leading technology and the software that’s customer facing but the key differentiator is the house vendor is offered a local property expert, effectively an estate agent who maybe a sort of self-run operation, and that guy will see the potential transaction through and guide the end customer along the whole process. So Purplebricks is much much more than just on online agent, it’s essential that it has got that face-to-face with an expert.

 

Q2: Why are you saying it’s the perfect combination for today’s house sellers?

A2: At the moment, the offer is either online which, as I’ve said, doesn’t really have that expertise and the personal touch but in terms of what Purplebricks users are doing is they’re able to track the progress of their viewings, arranged viewings and the progress of the whole transaction 24/7. In fact, 70% of the viewings of the Purplebricks site by the vendors are done outside normal agent hours so we’ve seen that some of the more progressive agents have extended their opening hours but they’re never going to be 24/7. In terms of how that’s actually come through to the type of demographic using it, the typical vendor is aged 45 plus and is already experienced in buying and selling homes, so these are probably fairly professional, organised home vendors and clearly the key point is that the cost is around about a quarter of that using a traditional high street estate agent.

 

Q3: What is the proof of the hybrid model?

A3: From the standing start 2 years ago, Purplebricks Group are now and I didn’t realise this until recently when I was looking into the detail, the fourth largest UK estate agent. That’s not the fourth largest online, and they are way biggest online, they’re the fourth largest only behind Countrywide, Connells and LSL. So they’re well ahead of Spicerhaart, Foxtons, Savills, those sort of guys, so really impressive 2 year track record to be the fourth biggest in the UK.

 

Q4: Now, you state that the model is also very attractive to partners, why do you say that?

A4: It’s really important that this is a hybrid model so the partners, the local property experts, are really crucial to the whole thing. In terms of the home vendors, we tried to explain how it benefits them being much better service and a quarter of the price of high street agents. In terms of how does this attract in the local property experts, well to set up your own estate agent would cost significant amounts of capital and the local property experts are predominantly on a licence with Purplebricks Group, there is no capital required upfront and they get a fee each time there’s an instruction. They work hard and are diligent and given that there’s all this software package backing up a very efficient transaction system, they could get £50,000 knocking on £100,000 a year income each, especially as there’s always the scope for those property experts to sub out the licences to others. It also does mean that those local guys have got a potential client for lettings management which is obviously quite a profitable business.

 

Q5: When you refer to the company as ‘the online leader in volume and trust’, what metrics are you using?

A5: We look at Google searches so since September, Purplebricks has been the leader in google searches for all agents, ahead of Foxtons, Connells and so forth so Google searches is clearly really important. There’s also various other sort of rankings, in terms of consumer rankings, so Trustpilot rates Purplebricks Group as excellent at 9.4 and the brand has received near 6 times the number of reviews to its nearest competitor so not only have reviews been positive but they are getting a lot of reviews. Indeed since January 2015, Purplebricks has been the leading search in the online operators so it’s got a very very high presence on the internet.

 

Q6: Ok, so what sort of rating are the shares on?

A6: This is an early stage business and as such its history has been to invest for that growth, we do actually see it coming into profitability in the year after next so that’s the year to April 2017. I think that an important metric is in terms of valuation to sales, so in that year to April 2017 that I was talking about that it breaks into profitability, its current market capitalisation is 5 times that years’ sales. If we compare that to admittedly the historic multiple of Rightmove, Rightmove is on more or less 20 times sales, Zoopla’s on 9 times sales, these are obviously portals which is a very very different model indeed. If you look at PE’s, we model out for 4/5 years and the PE that the stock is on in the year to April 2019 for example goes to single figures. So it’s a little way off but it’s current rating is on a very attractive multiple if you look at that sort of 3/4 years out for a business that’s only been going for 18 months.

 

Q7: What can you tell me about the Purplebricks Group Plc management expertise?

A7: There’s quite high profile management here, the founder and CEO Michael Bruce qualified as a solicitor and managing partner in 2 law firms but the key point is subsequently he was CEO and Chairman of Burchell Edwards, a large estate agency group, so he has got in-depth expertise of the estate agency market and sees how there was this need for something very very different. Paul Pindar who is the non-executive chairman is best known as the former group CEO of Capita which he joined in 1987 and grew from market cap of £8 million and it’s now in the FTSE 100. So there’s deep expertise of growing small businesses into very very large ones and deep expertise of the UK estate agency market, the management is quite large shareholders in the ongoing group.

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