Foxtons Group — Early signs of strategic success

Foxtons Group (LSE: FOXT)

Last close As at 28/02/2024

GBP0.58

−0.10 (−0.17%)

Market capitalisation

GBP176m

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Research: Real Estate

Foxtons Group — Early signs of strategic success

Foxtons Group’s Q1 trading update highlighted increased revenue per transaction and market share gains, evidence of early progress in rolling out the new strategy – characterised by upgrades to data infrastructure, investment in staff and a reinvigoration of the Foxtons brand. If the strategy succeeds, over the medium term Foxtons expects margins to expand by 500bp and operating profit to more than double. We retain our base case valuation of 59p/share and our preferred ‘bull’ case valuation of 124p/share, more than three times the current price.

Andy Murphy

Written by

Andy Murphy

Director, Financials & Industrials

Real Estate

Foxtons Group

Early signs of strategic success

Q1 trading update

Real estate

20 April 2023

Price

38.5p

Market cap

£127m

Forecast net cash (£m) at 31 December 2023

8.1

Shares in issue

330.1m

Free float

100%

Code

FOXT

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(2.0)

1.9

(16.4)

Rel (local)

(7.7)

0.9

(17.4)

52-week high/low

44.5p

27.4p

Business description

Foxtons Group is London’s leading and most widely recognised estate agency. It operates from a network of 57 interconnected branches offering a range of residential-related services, which break down into three separate revenue streams: sales, lettings and mortgage broking.

Next events

AGM

9 May 2023

Q2 results/interims

27 July 2023

Analyst

Andy Murphy

+44 (0)20 3077 5700

Foxtons Group is a research client of Edison Investment Research Limited

Foxtons Group’s Q1 trading update highlighted increased revenue per transaction and market share gains, evidence of early progress in rolling out the new strategy – characterised by upgrades to data infrastructure, investment in staff and a reinvigoration of the Foxtons brand. If the strategy succeeds, over the medium term Foxtons expects margins to expand by 500bp and operating profit to more than double. We retain our base case valuation of 59p/share and our preferred ‘bull’ case valuation of 124p/share, more than three times the current price.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/21

126.5

10.0

2.0

0.5

19.3

1.3

12/22

140.3

13.7

3.0

0.9

12.8

2.3

12/23e

137.8

13.5

2.4

0.8

16.0

2.1

12/24e

146.5

17.8

3.3

1.2

11.7

3.1

Note: *PBT is normalised, excluding amortisation of acquired intangibles, exceptional items discontinued business and share-based payments. EPS is similar but after charging for share-based payments and excluding deferred tax re-measurement attributable to the corporate tax charge, ie diluted company definition.

Total revenue growth of 10% reflects strategic action

Foxtons traded in line with management expectations in Q1 and reported total revenue growth of 10% to £32.9m. Stripping out M&A revenue relating to the Lettings division, underlying like-for-like revenue grew 5.3%, reflecting progress on the group strategy. This includes focusing on increased revenue/transaction in Lettings, where Foxtons has been prioritising longer non-cancellable tenancy terms. Furthermore, in Sales the benefit of increased headcount has resulted in an increase in market share and investment in training, and focus on estate agency key performance indicators has improved lead generation and cross-selling.

Lettings growth more than offsets weaker sales

The core Lettings division grew total revenue by 27% to £22.8m, driven by 20% organic growth and 7% from the May 2022 and March 2023 acquisitions. The division now accounts for 69% (FY22: 60%) of group revenue. Sales revenue declined as expected, by 16% to £8.1m, reflecting a lower under-offer pipeline at the start of the year, which was a consequence of the malaise caused by the September mini-budget. The Financial Services division was also affected by the lower activity level in the sales market, reporting revenue down 18% to £2.0m, offset by marginally higher volumes from refinance customers.

Valuation: 124p/share value retained

Foxtons completed the highest number of viewings in the last five years, which is a positive lead indicator for 2023, especially H2. Our underlying estimates are unchanged and our ‘bull’ case valuation, which attempts to reflect market share gains across all three divisions in line with the revised strategy, remains 124p/ share. It also attempts to reflect some value for yet to be announced M&A and Build to Rent activity. M&A has been a strong feature of the group for the last three years and is likely to remain so given its strategy, financial strength and the opportunities that exist.

Exhibit 1: Financial summary

£m

2019

2020

2021

2022

2023e

2024e

2025e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

106.9

93.6

126.5

140.3

137.8

146.5

155.0

EBITDA

 

 

13.5

15.7

25.1

27.8

26.7

30.0

32.5

Normalised operating profit

 

 

0.6

3.8

12.1

15.6

15.7

20.0

22.5

Amortisation of acquired intangibles

(0.6)

(0.8)

(1.7)

(1.6)

(1.8)

(1.9)

(1.9)

Share-based payments

(0.7)

(1.0)

(1.5)

(0.2)

(2.0)

(2.0)

(2.0)

Total adjusted operating profit

(0.7)

1.9

8.9

13.9

11.9

16.1

18.6

Exceptionals

(5.7)

(1.1)

(1.4)

(0.1)

0.0

0.0

0.0

Reported operating profit

(6.3)

0.8

7.6

13.8

11.9

16.1

18.6

Net Interest

(2.4)

(2.2)

(2.0)

(1.9)

(2.2)

(2.2)

(2.1)

Exceptionals

(0.1)

(0.0)

(0.0)

(0.0)

0.0

0.0

0.0

Profit Before Tax (norm)

 

 

(1.9)

1.6

10.0

13.7

13.5

17.8

20.3

Profit Before Tax (reported)

 

 

(8.8)

(1.4)

5.6

11.9

9.7

13.9

16.4

Reported tax

1.0

(1.8)

(6.9)

(2.4)

(2.3)

(3.5)

(4.1)

Discontinued operations

0.0

0.0

(4.8)

0.0

0.0

0.0

0.0

Net income (normalised)

(0.9)

(0.2)

(1.7)

11.4

11.2

14.4

16.2

Net income (reported)

(7.8)

(3.2)

(6.2)

9.6

7.4

10.5

12.3

Basic average number of shares outstanding (m)

275

314

324

308

308

308

308

EPS - basic normalised (p)

 

 

(0.32)

(0.08)

(0.52)

3.69

3.64

4.67

5.27

EPS - basic reported (p)

 

 

(2.83)

(1.02)

(1.90)

3.11

2.41

3.40

4.01

EPS - Continuing, diluted, and adjusted. Company definition

 

 

(1.06)

(0.16)

1.98

3.00

2.37

3.35

3.95

Dividend (p)

0.00

0.00

0.45

0.90

0.83

1.17

1.38

Revenue growth (%)

(-4.1)

(-12.5)

35.2

10.9

(-1.8)

0.0

0.0

EBITDA Margin (%)

12.6

16.8

19.9

19.8

19.3

20.5

20.9

Normalised Operating Margin

0.5

4.1

9.5

11.1

11.4

13.7

14.5

BALANCE SHEET

Fixed Assets

 

 

178.7

173.4

184.4

191.7

188.9

181.0

173.2

Intangible Assets

101.0

103.5

107.3

109.3

110.4

111.5

112.6

Goodwill

9.3

11.4

17.7

26.1

26.1

26.1

26.1

Tangible Assets

13.0

10.5

9.7

10.7

17.8

18.9

20.0

Right of use assets

51.4

44.4

43.8

42.6

31.6

21.6

11.6

Contract assets

0.6

0.4

0.9

1.7

1.7

1.7

1.7

Investments & other

3.3

3.1

5.1

1.4

1.3

1.3

1.2

Current Assets

 

 

30.2

52.6

39.3

34.5

32.4

41.2

50.9

Contract assets

1.0

1.7

3.7

5.7

5.7

5.7

5.7

Debtors

13.4

13.9

16.0

16.0

17.9

19.0

20.2

Cash & cash equivalents

15.5

37.0

19.4

12.0

8.1

15.8

24.3

Other

0.3

0.1

0.3

0.7

0.7

0.7

0.7

Current Liabilities

 

 

(27.9)

(29.2)

(31.9)

(38.7)

(37.1)

(38.0)

(38.9)

Creditors

(10.5)

(10.3)

(14.5)

(16.7)

(15.2)

(16.1)

(17.1)

Lease liabilities

(9.7)

(10.8)

(8.8)

(10.7)

(10.7)

(10.7)

(10.7)

Contract liabilities

(6.3)

(7.7)

(8.2)

(9.7)

(9.7)

(9.7)

(9.7)

Other

(1.4)

(0.4)

(0.3)

(1.5)

(1.5)

(1.4)

(1.4)

Long Term Liabilities

 

 

(65.2)

(62.4)

(68.4)

(64.9)

(54.1)

(43.3)

(32.6)

Lease liabilities

(46.2)

(40.7)

(39.3)

(35.8)

(25.0)

(14.2)

(3.5)

Contract liabilities

(1.3)

(1.1)

(1.1)

(0.3)

(0.3)

(0.3)

(0.3)

Other long term liabilities

(17.8)

(20.6)

(28.0)

(28.8)

(28.8)

(28.8)

(28.8)

Shareholders' equity

 

 

115.8

134.5

123.5

122.7

130.1

140.9

152.5

CASH FLOW

Op Cash Flow before WC and tax

(2.6)

4.3

6.6

15.0

13.7

18.0

20.5

Depreciation - Right of use assets

9.8

9.4

10.6

12.2

11.0

10.0

10.0

Impairment of goodwill

0.0

0.0

3.2

0.0

0.0

0.0

0.0

Branch asset impairment

4.3

1.7

1.1

(0.3)

0.0

0.0

0.0

Gain on disposal of PPE etc

(0.4)

(0.5)

(1.4)

(0.3)

(0.5)

(0.5)

(0.5)

Working capital

(2.6)

(0.6)

1.7

(1.2)

(3.4)

(0.2)

(0.2)

Decrease in provisions

0.8

(0.8)

0.2

1.1

(1.0)

(1.0)

(1.0)

Share based payment charges

0.7

1.0

1.5

0.2

2.0

2.0

2.0

Cash settlement of share incentive plan

(0.4)

0.0

0.0

(0.0)

(0.5)

(0.5)

(0.5)

Tax

0.2

0.2

(0.2)

(2.7)

(2.3)

(3.5)

(4.1)

Net operating cash flow

 

 

9.8

14.7

23.5

23.9

19.0

24.4

26.2

Capex

(0.3)

(0.4)

(1.7)

(2.9)

(0.4)

(0.4)

(0.4)

Acquisitions/disposals

(0.2)

(3.9)

(14.5)

(9.6)

(6.8)

(0.8)

(0.8)

Net interest

0.0

0.0

(0.0)

0.1

0.0

0.0

0.1

Dividends

0.0

0.0

(0.6)

(1.5)

(2.8)

(2.6)

(3.6)

Repayment of lease liabilities

(12.0)

(10.0)

(15.2)

(12.7)

(13.0)

(13.0)

(13.0)

Purchase of own shares

(0.1)

(0.3)

(5.7)

(4.9)

(0.3)

(0.3)

(0.3)

Net proceeds from issue of ord. Shares

0.0

21.1

0.0

0.0

0.0

0.0

0.0

Other

0.3

0.3

0.3

(3.4)

0.3

0.3

0.3

Net Cash Flow

(2.4)

21.5

(13.9)

(11.1)

(3.9)

7.7

8.5

Opening net debt/(cash)

 

 

(17.9)

(15.5)

(37.0)

(23.1)

(12.0)

(8.1)

(15.8)

Closing net debt/(cash) (ex-lease liabilities

 

(15.5)

(37.0)

(23.1)

(12.0)

(8.1)

(15.8)

(24.3)

Source: Company data and Edison Investment Research

General disclaimer and copyright

This report has been commissioned by Foxtons Group and prepared and issued by Edison, in consideration of a fee payable by Foxtons Group. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

General disclaimer and copyright

This report has been commissioned by Foxtons Group and prepared and issued by Edison, in consideration of a fee payable by Foxtons Group. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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