Purplebricks Group plc (LON:PURP) trading update for the 6 months to 31 October, reveals:
- §8% rise in number of instructions to 35,387 (1H last year: 32,850) with a 20% increase for the 5 months since June (see Exhibit 2 for our analysis);
- 1H adjusted EBITDA “expected to be comfortably ahead of consensus for the full year of £3.5m”;
- Net cash at end October 2020 above £75m (15 July: £66m; 30 April: £31m);
- Interims will be published on Tuesday 15 December.
Vic Darvey, CEO observed “growth in instructions …[proves] Purplebricks’ proposition has never been more relevant … We expect to deliver a pleasing profit performance in the first half, but it is too early to extrapolate this out to 2H.”
Zeus view: This short trading update reveals a larger truth: Purplebricks is perfectly positioned to grow profitably. This update reveals impressive instructions and cashflow.
Reported activity is even stronger than we expected. In August 2020, we forecast 50k instructions for the year to April 2021, with 28k in 1H (180-day average of 155 a day). Our daily review of Purplebricks’ listings on Zoopla, net of 37 properties a day being “remarketed”, indicated 34k instructions (180-day average of 190 a day). Actual 1H instructions of 35.4k is 4% above our estimate of current trading (34.0k) and 26% above our August 2020 forecast (28.0k).
Assuming 2H instructions are similar to last year (i.e. 20.8k), we raise forecast instructions by 12% to 56.2k (previous estimate: 50.0k). While this update does not comment on average revenue per instruction or gross margin, we raise our forecast revenue and gross profit by 9% to £82.0m and £51.5m respectively.
The £44m increase in net cash is outstanding: excluding the £35m capital receipt and various positive working capital features, we estimate 1H adj EBITDA of £6m. For 2H we expect Purplebricks to breakeven, leaving FY21 adjusted EBITDA of £6m (43% above our previous estimate of £4.2m).
Interims on 15 December will provide an opportunity to refine our forecasts.
Valuation: At 57p, Purplebricks has an enterprise value of £101m (net of £75m of net cash: 24p a share), which is 1.23x UK revenue and only 2.0x gross profit.
We suggest investors value Purplebricks Group on the basis of P/revenue + cash. An operating margin of 20%, with a PER of only 13x, is consistent with P/revenue of 2.1x (n.b. 2.1x £82.0m + £75m = £247m) or 80p a share (i.e. 40% upside).