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Purplebricks Group: Rebound post lockdown

What’s new: Purplebricks Group plc (LON:PURP) results for the year to 30 April 2020, show the Australian and US units as discontinued; but include the Canadian unit sold for C$60.5m (i.e. £35m) in July. Investors will focus on the UK unit which revealed:

  • 11% fall in UK revenue to £80.5m (FY19: £90.1m), as the number of instructions fell 23% (impacted by early Covid uncertainty and lockdown), but the average revenue per instruction “ARPI” rose 12% to £1,394;
  • UK gross profit margin improved to 64.1% (FY19: 63.0%);
  • UK marketing costs to revenue improved to 25.6% (FY19: 29.6%);
  • Spend on Digital capacity pushed UK operating costs 32% to £26.2m (FY19: £19.9m), as new management team pursued initiatives which are being “delivered at pace with significant opportunity for further innovation.”
  • UK adjusted EBITDA fell 53% to £4.8m (FY19: £10.2m).

Current trading: ”Despite market activity rebounding strongly (Viz: Purplebricks recorded over 7,000 instructions in July 2020: an average of 225 a day) outlook for the second half of year remains uncertain“.

n.b. Purplebricks currently has ”3.9% market share of instructions and 5.1% share of properties sold by volume” (Source: TwentyCi research, June 2020).

Balance sheet: Group had £66.0m of net cash on 15 July 2020, following the sale of the Canadian business. The exits from Australia, Canada and USA are complete.

Zeus view: 1Q started in lockdown but ended better than forecast with record monthly instructions. As uncertainty remains, we raise our FY21E transactions up to 7% below FY20 levels. As evidence appears, we may lift forecast ARPI and gross margin. We expect leverage on media spend and operating costs to reflect investment in Digital and innovation. We raise our revenue 12% to £75m and cut our adj EBITDA forecast 30% to £4.2m.

Looking forward to a more normal year, we see scope for ARPI to rise towards £2,000 (i.e. 43% above our forecast) and for instructions to be 20% above Covid-impacted levels. With a 63% gross profit margin and 20% marketing to revenue, £29m of operating costs, we see scope for EBITDA margin to reach 20%.

Valuation: At 47p, Purplebricks Group has an enterprise value (net of £66m of net cash: 21p a share) of £77m, which is 1.03x UK revenue and only 1.6x gross profit. We suggest investors value Purplebricks on the basis of P/revenue + cash. An operating margin of 20%, with a PER of only 10x on a normal tax charge is consistent with a P/revenue of 1.6x (n.b. 1.6x £83m +£66m = £199m).

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