Purplebricks Group plc (LON:PURP) is the topic of conversation when Zeus Capital’s Research Analyst Robin Savage caught up with DirectorsTalk for an exclusive interview.
Q1. You’ve published a research note today entitled “Well known but misunderstood”, this is in relation to Purplebricks Group. What are the key messages and what do people misunderstand about the company?
A1: Let me tell you 3 things that people know about the company and 3 things that are less well known:
First of all, let’s talk about the property market. Most people are well informed about their local residential property market, their house is their most valuable asset, they probably use Rightmove, Zoopla or OnTheMarket to provide updates on recent prices and market activity. They see For Sale boards outside properties and they will be aware and see that PURP has a strong presence in middle England, typically at the lower end property markets and a lower share of high end properties. The company does have physical presence as well as a presence on the internet.
The second thing is brand awareness and media spend. In the 5 years since its IPO, in December 2015, we estimate that the company has spent over £100 million building its brand. They measure its brand awareness, the data says that awareness is 98% and I would think that most people would agree because most people are aware of the company whereas the market itself is extremely fragmented.
The third thing is the company’s brand conversation is around about in the mid 30% which means that an early majority of vendors think about using the company. The actual conversion into people that actually use them is obviously a fraction of that and they have a market share of around about 5% in terms of properties which actually convert.
So, when you think about the company, we see its well positioned to grow its market share, particularly in a market where vendors want a hybrid estate agent, one that combines the best of digital with the human estate agent working in the interest of the vendor.
What people ought to know about the company, which they may not is that they remain exceptionally well-funded with around £70 million of cash, and No debt, and this should be seen in the context of next year’s annual revenues of approaching £100 million per annum. The gross profitability is over 60% so gross profits should be well over £60 million and the total of the admin costs and media spend should be under £50 million per annum. So, £70 million of cash means that they are exceptionally well funded particularly for an estate agent.
The second point they ought to know is that the company has around about a 5% market share of property transactions but if you actually looked at some individual markets, their market share is even higher. As I conceded earlier, in the really high-end market, they have a much lower market share than other agents, particularly top-end properties niches in which those particular agents involved in it have been able to maintain their market share. So, when you look at the company, what you see is some markets they have got market shares which are approaching 10% and so, the real change for management is to increase the company’s market share from around 5% towards the 10% as they grow in the areas where they have less than 10%.
The third point is that you can actually track the company’s activity by looking at Zoopla. We’ve been doing this the time of the IPO, we’ve got records of their transactions on Zoopla which show the seasonality of their instructions. We can then relate the data we collect on a daily basis with the data that they publish every half-year. With this data, we, and by extension investors, can be very confident about their current trading.
Q2. What changes have you made to your forecasts?
A2: From what we see from the data is that they are current trading increasing strongly and the research note has got a chart of daily instructions. We actually look at the moving average because the volatility in daily instructions can lead people to just look at it as complete noise. If you look at the weekly average, monthly average, the half-yearly average, and the annual average, what you see are patterns which give you good indications as to how the business is trading.
So, at the moment, what you have is the weekly average of daily instructions is close to 200 instructions a day and the annual average is around about 136, increasing as we maintain higher than that level of daily instructions. I expect that number to increase the annual average to 155 by the end of April which means that our forecasts are set to be met or exceeded because of the current trading.
We also have models that the deferral of revenue, one of the features of the interim numbers, and we feel confident that the second half of the year will benefit from around about £6 million of instruction revenue in the second half of the year to April.
In terms of the EBITDA, we feel confident that the company will exceed its guidance, the company gave guidance in December that it expected the EBITDA to be in excess of £10.6 million and our forecasts which we continue to have now is to have £11 million of EBITDA for this year.
What we would say is that current trading is strong and the mechanism in the way in which the accounting for spreading the revenue over the period of the expected sales mean that strong trading now will benefit it at the margin for the current year. Actually, what it’s doing is helping next year’s revenues and EBITDA to get creative.
So, we now set forecasts for the years to April 2022 and April 2023 and we based that on:
- Expectation that there will be a 10% recovery in property transactions over the next 2 years,
- That market share will rise from 5% to 5.7%
- That gross profit margins are just slightly less than they have been so they were 64% for the year to April 2020 and we expect them to be 64% for the current year, leading to 63% on our forecast.
- Expectation that the adjusted EBITDA margin to rise towards the medium term guidance of 25% to 30% but that will take a number of years to take effect.
Q3: How then, in your opinion, should investors value Purplebricks Group shares?
A3: We think there are three steps to valuing the company, in fact valuing a lot of businesses:
- Have a look at the cash position,
- Have a look at the business model and how the business as it gets bigger,
- Have a look at how you should value the business as a multiple of profitability, of dividends, if appropriate, or revenues.
So, in terms of the cash position, as I mentioned earlier, they have a very strong cash position, they had £75 million of net cash at the end of October. With 307 million shares in issue, we expect the cash per share to maintain at over 20p a share in terms of cash, that’s expected to be 22p per share. In other words, £69 million of net cash at the end of April this year. So, very strong cash position which provides a good strong basis for the value of the shares.
Secondly, we recognise the increasing returns to scale as the company increases on its business. I referred to a moment ago, the gross profit margin of 64% maybe, certainly over 60% for future years, and such businesses ought to operate at scale at operating margins which are in excess of 25%, probably more like 30%-35%.
If we look at valuations of businesses with these types of operating margins, we would expect these businesses to operate on revenue multiples which are more like 4.5 to 5 times revenue multiple, particularly if they are able to grow their sales 10% or so per annum.
I think at the moment, with the company trading on 2.6 current year sales, I think there’s great prospects for them.