Q&A with Zeus Capital: Launch of Purplebricks USA (LON:PURP)

Purplebricks Group Plc

Purplebricks Group PLC (LON:PURP) is the topic of conversation when Zeus Capital’s Research Director Robin Savage caught up with DirectorsTalk for an exclusive interview

 

Q1: Purplebricks has announced that it has launched Purplebricks USA in Los Angeles, how does USA division differ from the UK division?

A1: You can see on their website, you can chose to go to the UK, to Australia or the US. If you look at the US, you can see the product offering and you can compare them.

In the UK, the company has Local Property Experts (LPE’s) and in the USA it has Local Real Estate Experts (LREE’s). These LREE’s have been working on a self-employed basis for many years and you can see by looking at the pictures how many years they’ve been working and how many transactions they’ve handled. Now, these LREE’s have Purplebricks providing training, TV advertising and technology including 3D Virtual Reality.

While in the UK, they have been attracting the best agents from local traditional estate agents, in the US the market has thousands of self-employed realtors and these individuals are very part time and the number of transactions they handled a year is very very small because it’s essentially a part time activity.

The company should be able to build their network of LREE’s faster than in the UK and with their advertising and training hopefully the productivity of those LREE’s will go up substantially. Already they have 30 of these experts and in a few weeks, they will have 50 and I expect Purplebricks USA will have over 150 by March 2018.

In the UK, the company charges a fixed fee at instruction rather than a commission on the sale of the property which is what is traditional for estate agents, in the USA they will charge sellers a fixed fee and also a reduced commission on sale, in addition they can work for the buyers as a buyer’s agent.

The TV adverts in the US are similar to those in the UK and Australia. If you were to look at them, you’d see they’re a little bit less punchy because actually the US is quite a conservative place.

The UK division was launched in the spring of 2014 and broke even in the first half of last financial year and it should generate a respectable profit this year. Australia was launched in the Autumn of 2016 so it’s two years behind the UK and this division ought to be able to make a profit before brand building spend this year and reach breakeven in the following financial year. USA is three years behind the UK so a year behind Australia.

 

Q2: How can investors monitor the company’s success in the UK, Australia and USA?

A2: Well, investors should be delighted that the company provides more information on its business than any other UK Estate Agent, maybe even any other business. The easiest way to monitor the progress is to look at the website and look at the number of LPEs or in the US, the LREEs.

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In the UK, they have over 500 LPEs, in Australia they’ve got over 100 LPEs and growing and in the US, it’s already got 30 and soon they’ll have 50. So, the best way to look at it is initially to look at the number of agents and then you can keep an eye on the count of how many properties are being listed and every listing generates fees and then you should be looking at how many transactions there are.

 

Q3: Shares are currently trading at just over 400p, valuing the company at nearly £1.1 billion, how important is the USA division to the investment case?

A3: I estimate the opportunity in the USA is over 10 times the opportunity in the UK because the population in the US is greater, the revenue per transaction is greater and the market is even more fragmented than in the UK. The opportunity in Australia is approximately the same as the UK because although the Australian population is half the UK the revenue per transaction is over twice the UK.

So, in short, Purplebricks UK has over 30,000 properties on their website at the moment available for sale or where there’s indication of an offer being made, and is forecast to generate around about £80 million of revenue this year and an EBITDA of about £15 million for this year, £30 million EBITDA next year, £45 million the year after. Arguably, the UK business is worth well over £450 million based off forecasts for the period to March 2020 and you can probably think it’s around about £370 million valuation or 137p a share now.

So, you’ve got the Australian business which is arguably worth a similar amount but you need to discount that back two years because Australia is two years younger than the UK. So, using a 10% discount rate, obviously individual investors can choose their own, the value of that business is probably around about £1.13.

In total, those two businesses are probably worth £2.50 out of the current share price of £4.00 so I estimate the US business is implicitly valued at £1.50 a share and it’s got 30 LREEs but clearly that’s going to be growing and I think that valuation is low relative to its potential. One has to recognise that at this particular moment, it is not producing revenue and not producing EBITDA yet.

I suggest investors interested in Purplebricks keep an eye on the USA section of their website.

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