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Last close As at 17/03/2023
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GBP126m
Research: Real Estate
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.
Foxtons |
Growth-oriented review poised to be announced |
FY22 trading update |
Real estate |
7 February 2023 |
Share price performance
Business description
Next events
Analyst
Foxtons is a research client of Edison Investment Research Limited |
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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 |
PBT* |
EPS** |
DPS |
P/E |
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%.
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Exhibit 1: Revised estimates |
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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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Research: TMT
As flagged in Filtronic’s January trading update, demand for 5G mobile communications infrastructure and work for new customers drove 5% year-on-year revenue growth during H123. However, shortages of specific semiconductor components will result in some deliveries being delayed from FY23 to FY24. Since demand for the company’s products has not been affected, management expects an uplift in revenue and a return to the planned growth trajectory in FY24 as the temporary component shortages ease. We introduce FY24 estimates to reflect the anticipated recovery.
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