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M Winkworth — Update 2 December 2015

M Winkworth — Update 2 December 2015

M Winkworth

Analyst avatar placeholder

Written by

M Winkworth

Market non-recovery confirmed

Trading update

Real estate

3 December 2015

Price

142.5p

Market cap

£18m

Net cash (£m) at June 2015

2.1

Shares in issue

12.7m

Free float

50.6%

Code

WINK

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(10.1)

(8.1)

14.0

Rel (local)

(11.1)

(12.5)

16.4

52-week high/low

181.00p

118.50p

Business description

Winkworth is the franchisor of London’s largest chain of residential estate agents (58 offices). It has a number of franchisees outside the capital (40 offices) and an international presence that includes Portugal and Spain and associates in France, Italy and Switzerland.

Next events

FY15 results

April 2016

Analysts

Mark Thomas

+44 (0)20 3077 5700

Martyn King

+44 (0)20 3077 5745

M Winkworth is a research client of Edison Investment Research Limited

Challenging market conditions, especially in central London property, should not have come as any surprise. Management confidence in its franchise is emphasised by continued investment, and the tone of its commentary indicates that it expects payback in 2016. Growing franchise enquiries may give some company-specific support. Confirmation of these conditions means we have cut 2015 earnings estimates by 7%.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/13

4.9

1.7

10.3

5.4

13.8

3.8

12/14

5.5

2.0

12.1

5.9

11.8

4.2

12/15e

5.5

1.7

10.5

6.5

13.6

4.6

12/16e

5.9

1.8

11.6

7.2

12.3

5.0

Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments.

Trading July to November 2015

Winkworth advises that its previously market anticipated bounce in the housing market has not materialised, with the sales market being particularly slow in prime central London primarily attributed to the late-2014 stamp duty changes, which saw a significant rise in the tax for properties above £900k. This message is consistent with those reported by other estate agents and is unlikely to have been a surprise. The company expects full year revenues for 2015 to be in line with 2014. Costs reflect continued investment in new projects. Management notes that the Client Services Department has taken longer than estimated to reach break-even. As a consequence, it expects profits for 2015 to be slightly below market expectations.

Outlook: Estimates downgrade

We have cut our 2015/16 revenue estimates by c 4% and earnings by 7% and 12% respectively. The management outlook is that market conditions moving into 2016 are likely to be similar, with stamp duty undermining demand for more expensive properties, but low mortgage rates and wage inflation adding momentum at the lower end of the market. The adverse conditions are putting pressure on smaller agencies, without economies of scale, and Winkworth is reporting a pick-up in new franchising inquiries. It has three offices scheduled to open in the early part of next year, with more under discussion. We view management’s estimated 3-4% growth in the price of Greater London rentals as credible and we expect growth in company-specific rentals ahead of this (payback for investment costs over recent periods).

Valuation: Around fair value

The average of our valuation approaches is now 148p (previously 174p). The reduction in estimates drives down our dividend discount and Gordon’s growth models (to 156p and 159p respectively). The largest valuation fall is in our peer relative rating (from 161p to 129p), with an average c 10% rating reduction compounding the effect of our estimate reductions.

Changes in estimates

We have cut our revenue estimates by 4%, leaving 2015e flat on 2014. With modest diseconomies of scale from lower revenue, we have seen a deterioration in our operating margin. EPS forecasts are down c 10%. The strong balance sheet and earnings cover leaves our dividend unchanged.

Exhibit 1: Changes to forecasts

Revenue (£m)

Adj pre-tax profit (£m)

EPS (p)

DPS (p)

Old

New

Change
(%)

Old

New

Change
(%)

Old

New

Change
(%)

Old

New

Change
(%)

FY15e

5.7

5.5

(4)

1.8

1.7

(7)

11.2

10.5

(7)

6.5

6.5

0

FY16e

6.1

5.9

(4)

2.1

1.8

(12)

13.2

11.6

(12)

7.2

7.2

0

Source: Edison Investment Research.

Valuation

Discounted cash flow 156p (previously 177p)

We take our 2015/16 forecast operating cash generation (net of investing activities), grow this for a further 10 years at 4% pa and apply a terminal value of 10x the final year. All cash flows are discounted at our estimated cost of equity (10%). This produces a fair value of 156p (previously 177p), of which current cash represents 13%, cash flow in the forecast period 53% and the terminal value 34%. The reduction in 2016 profit estimates drives the lower valuation.

Gordon’s growth model 159p (previously 184p)

We use Gordon’s growth model to capture profitability and growth. Winkworth has low capital requirements and we believe it should generate good long-term returns on equity (we estimate 25%). With the growth and cost of equity assumptions as above, this implies it should trade at a multiple of 3.5x BV. With our estimated end 2016 NAV of 45.1p, this leads to a valuation of 159p (previously 184p). With the cut to estimates meaning 2015/16 forecast ROE is now only in line with our long-term assumptions, we have eliminated the 10% premium we had previously given for superior near-term performance There is a small effect from lower equity.

Peer comparisons 129p (previously 161p)

The share price movements of peers have been poor, falling significantly more than estimate cuts. The resultant lower earnings multiples, combined with our estimate cuts, sees a significant reduction in the peer group average valuation to 129p.

Exhibit 2: Summary of key peer group valuations

 

Share price (p)

Market cap

P/E (x)

Yield
(%)

Dividend
cover (x)

P/BV
(x)

2015

2016

2014

Winkworth

142.5

18.1

13.6

12.3

4.6%

1.8

4.6

MartinCo (franchise mainly lettings)

164.5

36.2

n/a

n/a

n/a

n/a

5.4

Belvoir lettings(franchise mainly lettings)

119.5

36.5

17.6

14.1

5.7%

1.3

3.3

Foxtons (London-based)

177.8

501.6

14.6

13.2

6.0%

1.3

3.4

Other estate agents

 

 

 

 

 

 

 

LSL

310

318.6

9.5

8.4

4.3%

2.8

3.6

Countrywide

397.5

873.0

12.5

11.1

3.7%

2.4

1.6

Estate agent peer average

 

 

13.5

11.7

4.9%

1.9

3.5

Implied Winkworth price

Average 129

141.9

135.2

133

 

107.5

Source: Thomson Reuters, Edison investment Research. Note: Prices as at 1 December 2015.

Exhibit 1: Financial summary

Year end Dec (£)

2009

2010

2011

2012

2013

2014

2015e

2016e

Total revenue

3,386,053

3,707,543

3,978,662

4,292,019

4,944,922

5,495,517

5,495,517

5,907,681

Cost of sales

(989,800)

(840,240)

(843,095)

(976,348)

(937,975)

(950,511)

(989,193)

(1,063,383)

Gross profit

2,396,253

2,867,303

3,135,567

3,315,671

4,006,947

4,545,006

4,506,324

4,844,298

Other income

3,515

0

0

0

0

0

0

0

Administration expenses

(1,532,594)

(1,758,691)

(1,944,760)

(1,982,454)

(2,347,969)

(2,704,886)

(2,967,579)

(3,131,071)

Operating profit (loss)

867,174

1,108,612

1,190,807

1,333,217

1,658,978

1,840,120

1,538,745

1,713,227

Exceptional (costs) / profit

0

0

0

(277,733)

0

0

0

0

Group operating profit

867,174

1,108,612

1,190,807

1,055,484

1,658,978

1,840,120

1,538,745

1,713,227

Finance income

2,314

2,805

10,667

16,500

32,572

86,313

100,000

100,000

Finance Expense

(474)

0

0

(6)

(18)

(270)

(50)

(50)

Pre-tax profit

869,014

1,111,417

1,201,474

1,071,978

1,691,532

1,926,163

1,638,695

1,813,177

Normalised pre-tax

869,014

1,111,417

1,201,474

1,349,711

1,707,361

1,957,822

1,670,354

1,844,836

Tax

(232,789)

(313,050)

(325,042)

(316,806)

(417,278)

(426,147)

(344,126)

(371,701)

Post tax profit

636,225

798,367

876,432

755,172

1,274,254

1,500,016

1,294,569

1,441,476

Profit (Loss )attributable to equity holders

633,972

803,981

878,334

755,172

1,274,254

1,500,016

1,294,569

1,441,476

O/w Profit (Loss) attributable to minority interests

2,253

(5,614)

(1,902)

0

0

0

0

0

Number of shares (m)

10.2

11.4

12.3

12.7

12.7

12.7

12.7

12.7

Basic EPS (p)

6.2

7.0

7.1

6.0

10.1

11.8

10.2

11.4

Adjusted EPS (p)

6.2

7.0

7.1

8.1

10.3

12.1

10.5

11.6

DPS Declared (p)

4.9

4.3

4.6

4.9

5.4

5.9

6.5

7.2

 

 

 

 

 

 

 

 

BALANCE SHEET

 

 

 

 

 

 

 

 

Goodwill

218,430

208,965

203,437

0

0

0

0

0

Other Intangibles

136,228

203,463

894,701

1,071,502

1,046,350

1,092,790

952,790

796,466

Property Plant and equipment

257,913

265,107

309,885

189,589

88,228

85,211

58,650

58,650

Financial assets

7,050

7,200

7,200

7,200

7,200

7,200

7,200

7,200

Trade and other receivables

0

100,000

135,574

301,588

237,265

810,704

1,000,000

1,150,000

Total non-current assets

619,621

784,735

1,550,797

1,569,879

1,379,043

1,995,905

2,018,640

2,012,316

Trade and other receivables

357,831

398,320

503,535

780,699

742,371

879,558

1,200,000

1,270,000

Cash

1,412,665

1,600,649

1,878,306

1,597,783

2,649,072

2,505,487

2,669,573

3,193,232

Total Current assets

1,770,496

1,998,969

2,381,841

2,378,482

3,391,443

3,385,045

3,869,573

4,463,232

Asset held for sale

0

0

0

0

50,084

0

0

0

Total Assets

2,390,117

2,783,704

3,932,638

3,948,361

4,820,570

5,380,950

5,888,213

6,475,548

Borrowings

(111,392)

(92,089)

(77,447)

(483)

0

0

0

0

Trade and other payables

(458,287)

(451,361)

(457,614)

(486,173)

(657,502)

(490,054)

(550,000)

(550,000)

Current Tax liabilities

(265,652)

(177,150)

(153,020)

(152,323)

(239,473)

(182,738)

(126,842)

(159,559)

Provisions

0

(112,000)

0

0

0

0

0

0

Total Current Liabilities

(835,331)

(832,600)

(688,081)

(638,979)

(896,975)

(672,792)

(676,842)

(709,559)

Deferred tax liabilities

(22,200)

(29,700)

(34,347)

(10,092)

(6,063)

(6,849)

(5,773)

(5,773)

Total non current liabilities

(22,200)

(29,700)

(34,347)

(10,092)

(6,063)

(6,849)

(5,773)

(5,773)

Total Liabilities

(857,531)

(862,300)

(722,428)

(649,071)

(903,038)

(679,641)

(682,615)

(715,332)

Equity Attributable to owners of company

1,524,116

1,919,502

3,210,210

3,299,290

3,917,532

4,701,309

5,199,271

5,761,315

NCI

(8,470)

(1,902)

0

0

0

0

0

0

 

 

 

 

 

 

 

 

Year-end no of shares

11.4

11.4

12.7

12.7

12.7

12.7

12.7

12.7

Equity NAV per share (p)

13.3

16.8

25.3

26.0

30.9

37.1

41.0

45.4

 

 

 

 

 

 

 

 

CASH FLOW

 

 

 

 

 

 

 

 

Operating Cash Flow

1,083,813

1,154,313

1,118,136

1,154,698

2,184,059

1,236,895

1,418,214

1,832,488

Net Interest

1,840

2,805

10,667

16,494

32,554

86,043

99,950

99,950

Tax

(121,365)

(394,051)

(344,525)

(341,758)

(334,157)

(482,093)

(375,812)

(354,012)

Purchase of intangible assets

0

(100,035)

(772,744)

(351,418)

(141,369)

(244,732)

(150,000)

(138,676)

Net Purchase of fixed assets

(115,463)

(55,739)

(137,867)

(22,411)

(17,474)

8,200

0

(5,000)

Financing

738,357

0

947,493

0

0

0

0

0

Dividends

(465,000)

(400,006)

(528,861)

(659,164)

(671,841)

(747,898)

(828,265)

(911,092)

Net Cash Flow

1,122,182

207,287

292,299

(203,559)

1,051,772

(143,585)

164,086

523,659

Opening net cash

179,091

1,301,273

1,508,560

1,800,859

1,597,300

2,649,072

2,505,487

2,669,573

Other

0

0

0

0

0

0

0

0

Closing net cash

1,301,273

1,508,560

1,800,859

1,597,300

2,649,072

2,505,487

2,669,573

3,193,232

Source: Winkworth, Edison investment research

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Copyright 2015 Edison Investment Research Limited. All rights reserved. This report has been commissioned by M Winkworth and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. 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Germany

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United Kingdom

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US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Tenon — Update 2 December 2015

Tenon

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