LSL Property Services plc (LON:LSL) is the topic of conversation when Zeus Capital’s Research Analyst Robin Savage caught up with DirectorsTalk for an exclusive interview.
Q1: This morning LSL Property Services has announced two important acquisitions, a 60% stake in Direct Life Quote Holdings Limited for £1.8 million and the business and assets of Mortgage Gym for £2.4 million. They’ve also made two key appointments , Steve Goodall as new MD and Andy Deeks as new Group Chief Strategy Officer. Robin, what impact will these acquisitions and appointments have on the Group?
A1: Well, let’s at first consider the new appointments.
Steve Goodall who’s going to be Managing Director of e.surv, which is one of the three important divisions of the company that provide surveying and valuations to banks, was until recently Chief Executive of AIM-listed ULS Technology plc (LON:ULS) and for the 13 years prior to that, he was the MD of Legal and General Surveying Services. So, he is extremely well qualified to do what he is there to do which is to look after the leading surveying business in the UK.
The second appointment is Andy Deeks who has been appointed Group Chief Strategy Officer, until recently he was Executive Director at Coventry Building Society responsible for Product, Marketing, Digital and Strategy. Importantly, he has got a very close long term business relationship with the Chief Executive of the group.
So, two very good appointments there.
Second, on the 2 acquisitions, David Stewart, Group Chief Executive said: “These important acquisitions will help the group drive further growth in Financial Services, which is at the heart of our strategy.” and I totally agree. The importance of these deals far exceeds headline consideration of only £4.2 million.
So, they do two important things, 1) they strengthen the company’s digital capability and 2) they are going to drive increased market share and profitability across, not only the group’s award-winning PRIMIS intermediary network which serves over 2,600 mortgage advisers but also Embrace Financial Services, which is the group’s specialist provider of mortgage and protection advice to estate agents and their customers. Also, it’ll help with the group’s specialist units which provide mortgage advice to buyers of new build homes and that work in partnership with new home developers.
Now, if we look at the two businesses.
Direct Life Quote Holdings trades under the brand name Life Quote, it’s an impressive, advanced technology platform that offers digital protection insurance product recommendations from a wide range of providers including Aegon, AIG, Aviva, all the way through the alphabet down to Scottish Widows, Vitality and Zurich. It provides these through intermediaries including Alexander Hall, fluent, Quilter Financial Planning and many others and also direct to retail customers via an end-to-end online service through third party aggregators. So, Direct Life Quote is going to be a very helpful part of the business when seen in conjunction with PRIMIS Mortgage Network.
So, if we look at Mortgage Gym, what we will see is an innovative digital platform, which pre-qualifies leads and matches borrowers with lenders. So, this is a business which the owners have invested £10 million over the last few years in developing the technology, it’s got a technology which is going to not only increase efficiency for PRIMIS but also the productivity of 2,600 mortgage advisers and it will help them grow market share. The technology enables the advisers or the end clients to see mortgage eligibility within 60 seconds, it’s able to match borrowers with lenders and it strengthens the technology support available to the group and PRIMIS mortgage advisers.
Thinking in simpler terms, it’s a bit like a gym but you also need to have the personal trainer to help you use the gym and essentially, Mortgage Gym is a very good spend of £10 million to create a technology that the company has got the advisers to make this really work. The group is already piloting Mortgage Gym in its new build market and the management, again, to accelerate the deployment, enhancing the service proposition through new home developers and then eventually through the mortgage distribution through its estate agents and others.
So, these are two really good acquisitions which I am convinced will support the company’s digital growth.
Q2: How does the company compare to other quoted stocks?
A2: Trading updates from the company and also Mortgage Advice Bureau (LON:MAB1), both have confirmed that in 2020, both groups grew the number of advisers using their networks by 8%; both are vital distribution routes for UK lenders and both expect house purchase mortgage activity to recover strongly in 2021.
The company, on 15th January 2021, guided to 2020 results which will be reported on the 9th March beating expectations. They see 8% rise in advisers to 2,600, they have got a pipeline of about 250 advisers wanting to join PRIMIS, they’ve got strong pipeline of written business and they’ve got 23% rise mortgage completions in December. This will be helpful to last year and then have a pipeline through to this year, the 12% rise in operating profit for the group to £41.5 million, the previous year was £37 million.
So, Mortgage Advice Bureau, a week later, produced a trading update which revealed 8%, so the same number percentage, rise in advisers, they’ve got 1,600 advisers so 1,000 less advisers, they’ve also got strong pipelines of adviser recruitment and written business and they also had a 20% rise in December mortgage completions. They say that the profits before tax will be ahead of current expectations but I should just point out that the current expectations are for £18.3 million so they’ll be lucky to get £20 million.
Essentially, the company is delivering twice Mortgage Advice Bureau’s profitability.
If you were to look head to head, what you’d see if the company has got over 1,000 more advisers using its platform, the group’s PRIMIS mortgage network has got a market share of over 9% whilst Mortgage Advice Bureau has got 6%. PRIMIS was created in 2018 and has been winning awards in recent years, it’s been the “Best Mortgage Network with over 300 Appointed Rep firms”, it’s won both Moneyfacts and Mortgage Introducers “Mortgage Network of the Year”, it’s won the 2020 Quality Awards for “Best Crisis Response” and it has also received an award for Cover excellence for the entitled “Best Intermediary Promotion of Protection and Health”.
So, I would say that the company is actually delivering in many ways that Mortgage Advice Bureau would like to and yet, when you look at the valuation, you can see that Mortgage Advice Bureau’s valuation is considerably higher than that of LSL.
We expect, on the 9th of March, the company’s results to show its financial services division delivering an increased share of group profits, we expect the mortgage PRIMIS network to be creating value, we expect consensus forecast to be updated for 2021 and 2022 and we will produce a more detailed note following that announcement.
Q3: How does LSL Property Services’ valuation then compare to Mortgage Advice Bureau?
A3: The company currently trades on a price earnings multiple of under 10 times last year or this year’s adjusted EPS while Mortgage Advice Bureau trades on over 25 times so I think you can see that there is definitely a multiple difference. I expect over a period of time for that to change.
Why would it change? Well, I will tell you briefly that the company has built this PRIMIS Mortgage Network through acquisition and subsequent integration and brand building. We see the intrinsic value of PRIMIS being in the range £310 million to £620 million which his £3 to £6 a share, the shares are currently trading at around about £2.40p.
So, in our sum of the parts valuation, we attribute the bottom end of that range so £328 million of value to PRIMIS, and the group equity market value to be £550 million or £5.08p a share. I genuinely see huge upside potential here in terms of looking at the real value of the businesses within the company.
I think it should trade at a premium to other businesses, in particular because of characteristics demonstrated by these recent acquisitions:
1) Scale, the company has 50% more scale than Mortgage Advice Bureau and that scaled has been added by today’s acquisitions.
2) Spillovers, this is an economic concept where sister businesses within the group are able to support each other and I think we definitely see that in today’s acquisition.
3) Synergies, this is where there is proper integration of the businesses and we will see that in the way that Mortgage Gym in particular is integrated into the company’s business and Life Quote helps the other businesses.
4) Sunk costs, there are significant sunk costs within Mortgage Gym, the £10 million of investment that’s been made and that’s been acquired for only £2.4 million.
So, I think you can see in the acquisition of both Mortgage Gym and Life Quote, the way in which the company has been creating value and will continue to create value for shareholders. When equity market fully appreciates the company’s business units, the group’s valuation multiples have the potential to double.