Foxtons Group — Growth-oriented review poised to be announced

Foxtons Group (LSE: FOXT)

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Research: Real Estate

Foxtons Group — Growth-oriented review poised to be announced

FY22 was a robust year for Foxtons with revenue up 11%, but the short-term outlook is less certain for recessionary reasons. However, the outlook remains encouraging with the new CEO on the cusp of announcing a growth-oriented operational review. 65% of revenue is now generated from the resilient Lettings and Financial Services divisions, a proportion that is likely to increase over time. Our ‘base’ case valuation gives a value of 53p/share, but ignores the potential of M&A expansion in particular. Our revised ‘bull’ case valuation implies a share price of 118p, which is more than twice the current share price, highlighting the potential.

Andy Murphy

Written by

Andy Murphy

Director, Financials & Industrials

Male hand showing, offering a new dream house at the empty field with copy space

Real Estate

Foxtons

Growth-oriented review poised to be announced

FY22 trading update

Real estate

7 February 2023

Price

39p

Market cap

£129m

Net cash (£m) at 31 December 2022

c 12

Shares in issue

330.1m

Free float

100%

Code

FOXT

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

18.6

13.7

(3.2)

Rel (local)

16.1

5.7

(5.3)

52-week high/low

46.7p

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

Prelims

7 March 2023

AGM

May 2023

Analyst

Andy Murphy

+44 (0)20 3077 5700

Foxtons is a research client of Edison Investment Research Limited

FY22 was a robust year for Foxtons with revenue up 11%, but the short-term outlook is less certain for recessionary reasons. However, the outlook remains encouraging with the new CEO on the cusp of announcing a growth-oriented operational review. 65% of revenue is now generated from the resilient Lettings and Financial Services divisions, a proportion that is likely to increase over time. Our ‘base’ case valuation gives a value of 53p/share, but ignores the potential of M&A expansion in particular. Our revised ‘bull’ case valuation implies a share price of 118p, which is more than twice the current share price, highlighting the potential.

Year end

Revenue
(£m)

PBT*
(£m)

EPS**
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/20

93.6

1.6

(0.2)

0.0

N/A

N/A

12/21

126.5

10.0

2.0

0.5

19.7

1.2%

12/22e

140.0

14.6

2.7

0.9

14.7

2.4%

12/23e

135.7

12.7

2.2

0.8

17.5

2.0%

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 company definition.

FY22 trading in line with previously raised estimates

Despite the economic volatility in 2022, Foxtons delivered revenue growth of 11% to c £140m, with growing contributions from all three divisions. This figure exceeds market expectations of £133.8m and operating profit is also expected to be ahead of the market consensus of £12.5m (Edison estimate £13.1m). The growth includes contributions from the three acquisitions in the year, including the Douglas & Gordon lettings portfolio of some 2,500 tenancies. The total lettings portfolio now stands at c 26,500 properties (FY21: 25,200).

Operational review designed to drive growth

There has been significant management change at Foxtons, including a new CEO, Guy Gittins, who is conducting an operational review of the business that is likely to result in a plan to drive future growth and to rebuild the Foxtons ‘DNA’. This will mean investing in the brand and in people, ensuring sufficient headcount capacity in branch and an ability to better leverage data and technology. It will include an element of cost, but savings from cost-cutting are likely to largely self-fund the programme. Details of the review will be announced alongside the FY results on 7 March. Lessons relating to staffing numbers in slower markets have been heeded, which implies that Foxtons will be better placed to take advantage of more buoyant markets when they emerge, potentially in the second half of FY23.

Revised bull valuation of 118p implies material upside

The outlook for H123 is less clear and has led us to cut FY23e EPS by 18% to 2.2p. However, our FY24e EPS of 3.1p is largely unchanged. Lettings revenue should be resilient but Sales are more uncertain as mortgage interest rates are elevated from a year ago, though are now falling, which is encouraging. Our ‘bull’ case valuation, which attempts to reflect M&A, is revised down from 128p/share to 118p/share.

Short-term uncertainty reduces estimates and valuation

It should not surprise anybody that rising interest rates and political announcements in the autumn of 2022 affected the estate agency market. The effects are likely to be felt by Foxtons in H123, but with mortgage rates falling steadily and the Bank of England anticipating that inflation will fall to 3.5% by the end of this year, H223 and FY24 could see an improving market. That said, Sales, in particular, are now expected to be down c 10% this year and therefore we have reduced our FY23 PBT estimate by c 20%. Our ‘base’ case valuation gives a value of 53p/share, comfortably above the current share price, but ignores the potential of M&A expansion in particular. In our ‘bull’ case valuation we have rolled over the base year to FY24 and there is a modest reduction in our valuation, from 128p to 118p, which is still more than twice the current share price.

FY23 estimates reduced to reflect uncertainty and rising costs

Per the trading update, FY22 revenue and operating profits are now expected to grow c 11% and 47%, respectively, and to come in ahead of previous consensus expectations. However, given the hiatus in the markets after the September 2022 mini-budget, the short-term outlook for H123 is less clear and we have reduced both full-year revenue and profit forecasts, largely due to lower volumes of sales and a lower revenue per sale. We have assumed a c 10% reduction in each. Well publicised inflationary pressures are also affecting the cost base.

In total, we are now anticipating a £4.3m/c 3% reduction in revenue in FY23, and a £2.1m/c 13% reduction in adjusted operating profit. Foxtons is expected to end FY22 with net cash of c £12m, and the reduction flows through to our net cash estimate of c £15m at the end of FY23.

In FY24e, we have edged up revenue, reflecting some small recovery in the market and the benefit of the ongoing investment in headcount. The modest decline in forecast profitability is a reflection of underlying inflation, the inexperience of new employees yet to hit peak productivity and the increase in UK corporation tax from 19% to 25%.

Exhibit 1: Revised estimates

FY21A

FY22e (Old)

FY22e (New)

Chg (%)

FY23e (Old)

FY23e (New)

Chg (%)

FY24e (Old)

FY24e (New)

Chg (%)

Revenue

126.5

135.3

140.0

3.5%

137.1

135.7

-1.0%

142.2

143.5

0.9%

YoY growth (%)

-

7.0%

10.7%

-

1.3%

-3.1%

-

3.7%

5.8%

-

Adjusted operating profit

8.9

13.1

13.1

0.4%

13.5

11.4

-15.4%

15.4

14.9

-3.0%

YoY growth (%)

-

46.5%

47.0%

-

3.1%

-13.2%

-

14.1%

30.8%

-

PBT

5.6

10.7

10.7

0.1%

11.4

9.1

-19.7%

13.3

12.8

-4.0%

YoY growth (%)

-

92.7%

93.0%

-

6.2%

-14.8%

-

17.1%

39.9%

-

EPS (Company definition)

2.0

2.6

2.7

2.1%

2.7

2.2

-18.2%

3.1

3.1

-1.1%

YoY growth (%)

-

31.2%

33.9%

-

5.0%

-15.8%

-

13.6%

37.2%

-

DPS

0.5

0.9

0.9

3.2%

1.0

0.8

-17.7%

1.1

1.1

-2.5%

YoY growth (%)

-

100.0%

106.4%

-

5.6%

-15.8%

-

15.8%

37.2%

-

Net cash (pre-IFRS 16, ie ex-lease liabs)

23.1

15.3

11.9

-22.0%

23.2

15.2

-34.6%

30.5

23.4

-23.2%

YoY growth (%)

-

-33.7%

-48.3%

-

51.6%

27.2%

-

31.5%

54.3%

-

Source: Edison Investment Research and Foxtons

Valuation modestly reduced but material upside exhibited

Despite the uncertainty in markets, we have retained our ‘bull’ case valuation methodology because we believe that the opportunity to expand the business remains and is likely to be given a boost by the new senior management team as well as the growth-oriented company review being finalised by the new CEO.

We have rolled over the base year to FY24, but pared the valuation back from 128p to 118p, reflecting the modest downgrade in FY24 and the increase in corporation tax rates. Our valuation methodology attempts to reflect market share gains across all three divisions, which we believe are likely as headcount is increased, as well as attempting 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 two years and is likely to remain so given its strategy, its financial strength and the opportunities that exist.

The additional c £24m of revenue assumed over and above the FY24 estimate of £143.5m is then assumed to have a c 65% drop-through rate to which we apply a 17.5x PER to the implied earnings in arriving at our revised 118p/share ‘bull’ case valuation.


Exhibit 2: Financial summary

£'m

2019

2020

2021

2022e

2023e

2024e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

106.9

93.6

126.5

140.0

135.7

143.5

EBITDA

 

 

13.5

15.7

25.1

28.7

26.0

28.5

Normalised operating profit

 

 

0.6

3.8

12.1

16.7

15.0

18.5

Amortisation of acquired intangibles

(0.6)

(0.8)

(1.7)

(1.6)

(1.6)

(1.6)

Share-based payments

(0.7)

(1.0)

(1.5)

(2.0)

(2.0)

(2.0)

Total adjusted operating profit

(0.7)

1.9

8.9

13.1

11.4

14.9

Exceptionals

(5.7)

(1.1)

(1.4)

(0.3)

0.0

0.0

Reported operating profit

(6.3)

0.8

7.6

12.9

11.4

14.9

Net Interest

(2.4)

(2.2)

(2.0)

(2.2)

(2.3)

(2.2)

Exceptionals

(0.1)

(0.0)

(0.0)

0.0

0.0

0.0

Profit Before Tax (norm)

 

 

(1.9)

1.6

10.0

14.6

12.7

16.4

Profit Before Tax (reported)

 

 

(8.8)

(1.4)

5.6

10.7

9.1

12.8

Reported tax

1.0

(1.8)

(6.9)

(2.6)

(2.1)

(3.2)

Net income (normalised)

(0.9)

(0.2)

(1.7)

11.9

10.6

13.2

Net income (reported)

(7.8)

(3.2)

(6.2)

8.1

7.0

9.6

Basic average number of shares outstanding (m)

275

314

324

308

308

308

EPS - basic normalised (p)

 

 

(0.32)

(0.08)

(0.52)

3.88

3.44

4.28

EPS - basic reported (p)

 

 

(2.83)

(1.02)

(1.90)

2.63

2.27

3.11

EPS - Continuing, diluted, and adjusted. Company def.

 

 

(1.06)

(0.16)

1.98

2.65

2.23

3.07

Dividend (p)

0.00

0.00

0.45

0.93

0.78

1.07

Revenue growth (%)

(-4.1)

(-12.5)

35.2

10.7

(-3.1)

0.0

Normalised Operating Margin

0.5

4.1

9.5

12.0

11.1

12.9

BALANCE SHEET

Fixed Assets

 

 

178.7

173.4

184.4

184.5

174.9

166.4

Intangible Assets

101.0

103.5

107.3

108.2

109.3

110.4

Goodwill

9.3

11.4

17.7

17.7

17.7

17.7

Tangible Assets

13.0

10.5

9.7

21.0

21.4

21.8

Right of use assets

51.4

44.4

43.8

31.8

20.8

10.8

Contract assets

0.6

0.4

0.9

0.9

0.9

0.9

Investments & other

3.3

3.1

5.1

4.9

4.8

4.8

Current Assets

 

 

30.2

52.6

39.3

29.7

31.6

37.8

Contract assets

1.0

1.7

3.7

3.7

3.7

3.7

Debtors

13.4

13.9

16.0

19.6

20.4

21.5

Cash & cash equivalents

15.5

37.0

19.4

8.2

11.5

19.7

Other

0.3

0.1

0.3

(1.7)

(3.9)

(7.1)

Current Liabilities

 

 

(27.9)

(29.2)

(31.9)

(32.8)

(31.3)

(33.1)

Creditors

(10.5)

(10.3)

(14.5)

(15.4)

(13.9)

(15.8)

Lease liabilities

(9.7)

(10.8)

(8.8)

(8.8)

(8.8)

(8.8)

Contract liabilities

(6.3)

(7.7)

(8.2)

(8.2)

(8.2)

(8.2)

Other

(1.4)

(0.4)

(0.3)

(0.3)

(0.3)

(0.3)

Long Term Liabilities

 

 

(65.2)

(62.4)

(68.4)

(55.6)

(42.7)

(28.7)

Lease liabilities

(46.2)

(40.7)

(39.3)

(28.5)

(17.7)

(7.0)

Contract liabilities

(1.3)

(1.1)

(1.1)

(1.1)

(1.1)

(1.1)

Other long term liabilities

(17.8)

(20.6)

(28.0)

(26.0)

(23.8)

(20.6)

Shareholders' equity

 

 

115.8

134.5

123.5

125.8

132.6

142.3

CASH FLOW

Op Cash Flow before WC and tax

(2.6)

4.3

6.6

14.1

13.0

16.5

Depreciation - Right of use assets

9.8

9.4

10.6

12.0

11.0

10.0

Impairment of goodwill

0.0

0.0

3.2

0.2

0.0

0.0

Branch asset impairment

4.3

1.7

1.1

0.0

0.0

0.0

Gain on disposal of PPE etc

(0.4)

(0.5)

(1.4)

(0.7)

(0.5)

(0.5)

Working capital

(2.6)

(0.6)

1.7

(2.7)

(2.2)

0.7

Decrease in provisions

0.8

(0.8)

0.2

1.0

(1.0)

(1.0)

Share based payment charges

0.7

1.0

1.5

2.0

2.0

2.0

Cash settlement of share incentive plan

(0.4)

0.0

0.0

(0.5)

(0.5)

(0.5)

Tax

0.2

0.2

(0.2)

(2.0)

(2.1)

(3.2)

Net operating cash flow

 

 

9.8

14.7

23.5

23.4

19.6

24.0

Capex

(0.3)

(0.4)

(1.7)

(2.3)

(0.4)

(0.4)

Acquisitions/disposals

(0.2)

(3.9)

(14.5)

(9.5)

(0.1)

(0.1)

Net interest

0.0

0.0

(0.0)

0.0

(0.1)

0.1

Dividends

0.0

0.0

(0.6)

(1.5)

(2.9)

(2.4)

Repayment of lease liabilities

(12.0)

(10.0)

(15.2)

(13.0)

(13.0)

(13.0)

Purchase of own shares

(0.1)

(0.3)

(5.7)

(4.9)

(0.3)

(0.3)

Net proceeds from issue of ord. Shares

0.0

21.1

0.0

0.0

0.0

0.0

Other

0.3

0.3

0.3

(3.4)

0.3

0.3

Net Cash Flow

(2.4)

21.5

(13.9)

(11.2)

3.2

8.2

Opening net debt/(cash)

 

 

(17.9)

(15.5)

(37.0)

(23.1)

(11.9)

(15.2)

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

 

(15.5)

(37.0)

(23.1)

(11.9)

(15.2)

(23.4)

Source: Foxtons and Edison Investment Research


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This report has been commissioned by Foxtons and prepared and issued by Edison, in consideration of a fee payable by Foxtons. 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.

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General disclaimer and copyright

This report has been commissioned by Foxtons and prepared and issued by Edison, in consideration of a fee payable by Foxtons. 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.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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