Foxtons — Strong results, dividend and share buy back in H2

Foxtons Group (LSE: FOXT)

Last close As at 18/04/2024

GBP0.53

0.40 (0.77%)

Market capitalisation

GBP159m

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Research: Real Estate

Foxtons — Strong results, dividend and share buy back in H2

Foxtons Group’s core London market has been improving all year and the interim results highlight both the recovery and the contribution from recent acquisitions. Furthermore, the company announced a return to paying dividends in respect of the half year and given the strength of both trading and the balance sheet, revealed a £3m share buyback programme that should augment earnings. We retain our underlying assumptions but raise our valuation by 1p to 130p to reflect the share buyback.

Andy Murphy

Written by

Andy Murphy

Director, Financials & Industrials

Real Estate

Foxtons Group

Strong results, dividend and share buy back in H2

H121 results and outlook

Real estate

2 August 2021

Price

53p

Market cap

£172m

Net cash (£m) at 30 June 2021 *Excluding lease liabilities

24.4

Shares in issue

327.7m

Free float

100%

Code

FOXT

Primary exchange

London

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(3.4)

(13.2)

49.9

Rel (local)

(3.7)

(14.2)

23.7

52-week high/low

74p

32p

Business description

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

Next events

Q3 trading update

October 2021

Analyst

Andy Murphy

+44 (0)20 3077 5700

Foxtons Group is a research client of Edison Investment Research Limited

Foxtons Group’s core London market has been improving all year and the interim results highlight both the recovery and the contribution from recent acquisitions. Furthermore, the company announced a return to paying dividends in respect of the half year and given the strength of both trading and the balance sheet, revealed a £3m share buyback programme that should augment earnings. We retain our underlying assumptions but raise our valuation by 1p to 130p to reflect the share buyback.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/19

106.9

(1.9)

(0.3)

0.0

N/A

N/A

12/20

93.6

1.6

(0.1)

0.0

N/A

N/A

12/21e

130.1

8.1

0.1

0.5

622.2

1.0

12/22e

137.7

12.5

3.4

0.8

15.8

1.6

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

Strong markets and M&A imply good growth

Foxtons reported H1 revenue of £66.9m, up 29% versus H119, comfortably ahead of our expectations. Operating profit was £5.2m having been in loss in both 2019 and 2020 and PBT was £3.3m, again having been in loss for the previous two years. Adjusted EPS was 1.1p/share which has allowed Foxtons to declare a dividend of 0.18p/share. The company ended the period with net cash of £24.4m which along with the positive cash inflow has encouraged the board to announce a £3m share buyback.

Underlying forecasts unchanged

The outlook is encouraging despite the tapering of the stamp duty holiday as the market appears to be maintaining momentum. Our underlying full year forecasts are essentially unchanged, bar the inclusion of £1.5m of branch business rates, taken voluntarily in H1 and paid in July. Foxtons continues to roll out its growth strategy which was highlighted in its June capital markets day. This includes investing in the underlying business, pursuing M&A of lettings books, regional expansion and focusing on the Build to Rent (BTR) market which is expanding rapidly.

Valuation: Bull case value edges up to 130p/share

Our base case shows 2022e EPS of 2.4p, which gives a valuation below the current share price when we apply the average 2014/15 P/E of 17.5x. If we roll over our forecasts to 2023e, our basic, adjusted and diluted EPS of 2.9p implies a valuation of 50.8p, much closer to the current price. However, we would argue that future growth may not be fully reflected in the share price or our estimates as we do not forecast acquisitions. Our bull case highlights the potential upside in forecasts, where Foxtons is particularly geared to further acquisitions of lettings books as well as growth from BTR, regional expansion and underlying markets. Our bull case scenario suggests a potential 2022e EPS of 7.4p, which implies a valuation of 130p/share when the 17.5x P/E is applied, a 1p uplift due to the £3m share buyback announced.

H1 group and divisional performance

Foxtons reported H121 revenue of £66.9m, which was up 66% versus the previous year and 29% versus 2019. Excluding £7.2m of revenue from Douglas and Gordon (D&G), underlying revenue was up 48% and 15% respectively. These growth rates include the impact of the loss of £1.4m from the tenant fee ban. The principal drivers of the revenue growth were the increase in lettings volumes which were up 26% y-o-y to 10,026, and sales volumes which were up 141% y-o-y to 2,071. Mortgage volumes were also up, by 35% to 2,795, but the revenue base is much smaller compared to the Lettings and Sales divisions.

Exhibit 1: Interim results summary

H119

H120

H121

H121 vs H119

H121 vs H120

Revenue

Lettings

32.4

25.7

33.1

2.0%

28.8%

Sales

15.4

11.1

28.6

85.5%

158.7%

Mortgage Broking

4.0

3.6

5.2

31.0%

44.3%

Total revenue

51.8

40.4

66.9

29.1%

65.9%

Adjusted operating profit

Lettings

2.0

2.0

1.5

-27.3%

-27.3%

Sales

(3.5)

(4.8)

2.7

-

-

Mortgage Broking

0.6

0.5

1.1

71.8%

134.4%

Total adjusted operating profit

(0.9)

(2.4)

5.2

-

-

PBT (ex exceptionals)

(2.1)

(3.5)

4.1

-

-

EPS - basic, diluted and adjusted (p)

(0.7)

(1.6)

1.1

-

-

DPS (p)

0.0

0.0

0.18

-

-

Net cash

14.5

40.5

24.4

67.8%

-39.9%

Source: Foxtons and Edison Research

Operating profit improved dramatically, from losses in both 2019 and 2020, to £5.2m in H121. This figure includes c £1m benefit from the acquisition of D&G, but also a charge of £1.5m relating to the voluntary payment of branch business rates. Basic, diluted and adjusted EPS came in a 1.1p and Foxtons declared its first dividend since 2017, of 0.18p/share, in line with its strategy to pay out 35–40% of earnings as dividends.

Foxtons ended the period with net cash of £24.4m after the payment of £10m as part consideration for D&G and a £3m investment in Boomin. This strong position and positive outlook encouraged Foxtons to announce a second share buyback, this time of £3m. We estimate that the buyback is c 1% earnings enhancing in a full year.

Lettings activity showing signs of recovery

Total lettings increased 26% y-o-y to 10,026, benefiting from c 700 units in H1 from the D&G acquisition (from 1 March 2021). This represents growth of 8.2% over the same period in 2019. Revenue per unit improved modestly from £3,229 in H120, to £3,300, benefiting from the higher rates achieved from the acquired business. Adjusting for the acquisition and for the £1.4m impact of the tenant fee ban, average rentals were down c 9% versus 2019. That said, rates are now beginning to improve, and is likely to be given a boost if international travel continues to reopen and international students return from September. Overall, Lettings revenue was marginally higher than the same period in 2019.

Exhibit 2: Foxtons’ Lettings activity, last five half years

Source: Foxtons

Sales activity more than doubled

H121 saw sales volumes increase by more than 140% to 2,071, including c 200 units from D&G. This volume represents growth of more than 70% versus 2019. Clearly, the business benefited from the stamp duty holiday and pent-up demand from the lockdown. Revenue per unit was also up, by 7% to £13,833, again benefiting from the higher value sales from the acquired business. However, underlying revenue per unit was c 2% higher on the underlying business. In total, Sales revenue was up nearly 160% to £28.6m, a level not achieved since 2016.

Exhibit 3: Foxtons’ Sales activity, last five half years

Source: Foxtons

Mortgage Broking volumes up 35% y-o-y

Mortgage Broking activity was also strong in the period, benefiting from the strength in the sales volumes referred to above. In total, volumes increase 35% y-o-y to 2,795 and average revenue per transaction rose 7% to £1,859. Overall, the business generated revenue of £5.2m in the period, comfortably ahead of H120, and 31% ahead of H119.

Currently, Foxtons is conducting a strategic review of the Mortgage Broking business which could lead to one of a number of outcomes. This is because the business is currently unable to handle the volume of activity that the rest of Foxtons is able to channel to the division without significant levels of investment. However, given the strategic fit of the operation with the core sales business, we believe it is likely that Foxtons will retain some interest in the business in the long term.

Exhibit 4: Foxtons’ Mortgage Broking activity

Source: Foxtons

Underlying forecasts unchanged: Valuation edges up to 130p/share

Our underlying trading assumptions are unchanged. However, due to Foxtons’ decision to voluntarily pay £1.5m of branch business rates in July (relating to the first half), we have reflected the charge in our 2021 estimates. This is the primary driver of the reduction in PBT, the balance being minor exceptional charges. Our 2022 and 2023 estimates are essentially unchanged.

Exhibit 5: Summary of estimate changes

 

PBT
(old, £m)

PBT reported (new, £m)

%
change

EPS
(old, p)

EPS basic reported (new, p)

%
change

2020

(1).4

(1.4)

-

(1.0)

(1.0)

-

2021e

5.976

4.237

-29.1

1.5

(1.1)

-

2022e

9.549

9.539

-0.1

2.4

2.4

1.5

2023e

11.685

11.693

0.1

2.9

3.0

1.8

Source: Company data, Edison Research

Our valuation is unaffected by the changes above, but due to the share buyback, we have reduced the shares in issue which edges up our valuation from 129p/share to 130p/share.

Exhibit 6: Bear, base and bull case revenue and profit scenarios

£m unless stated

2022e

Bear

Base

Bull

Comments

2019 revenue base

106.9

106.9

106.9

Organic revenue growth

-8.9

12.8

32.4

M&A revenue growth

16.2

18.0

25.3

2022 revenue

114.1

137.7

164.6

 

Operating profit

(6.2)

11.5

31.7

Applied 75% drop-through to decline and growth scenarios

Interest

(1.9)

(1.9)

-1.9

Assumed same in all scenarios

PBT

(8.1)

9.5

29.8

Tax (@ 19%)

-

(1.8)

(5.7)

Profit after tax

(8.1)

7.7

24.1

 

Average (diluted) shares in issue (m)

324.4

324.4

324.4

 

EPS (p)

(2.5)

2.4

7.4

 

Current price (p)

53

 

 

Implied 2022e P/E (x)

-21.2

22.3

7.1

Potential value per share

Target P/E (x)

17.5

17.5

Average forward P/E in 2014/2015 was 17.5x.

Implied value per share (p)

41.7

130.0

Source: Edison Investment Research

Exhibit 7: Financial summary

Year end 31 December, IFRS

£'m

2018

2019

2020

2021e

2022e

2023e

INCOME STATEMENT

Revenue

 

 

111.5

106.9

93.6

130.1

137.7

142.4

Normalised operating profit

 

 

(0.3)

0.6

3.8

10.0

14.5

16.5

Amortisation of acquired intangibles

(0.2)

(0.6)

(0.8)

(1.2)

(1.0)

(1.0)

Exceptionals

(15.7)

(5.7)

(1.1)

(0.8)

0.0

0.0

Share-based payments

(1.3)

(0.7)

(1.0)

(1.8)

(2.0)

(1.9)

Reported operating profit

(17.6)

(6.3)

0.8

6.2

11.5

13.6

Net Interest

0.0

(2.4)

(2.2)

(1.9)

(1.9)

(1.9)

Exceptionals

0.3

(0.1)

(0.0)

(0.1)

0.0

0.0

Profit Before Tax (norm)

 

 

0.0

(1.9)

1.6

8.1

12.5

14.6

Profit Before Tax (reported)

 

 

(17.2)

(8.8)

(1.4)

4.2

9.5

11.7

Reported tax

0.0

1.0

(1.8)

(7.8)

(1.8)

(2.2)

Net income (normalised)

0.0

(0.9)

(0.2)

0.3

10.7

12.4

Net income (reported)

(17.2)

(7.8)

(3.2)

(3.6)

7.7

9.5

Basic average number of shares outstanding (m)

275

275

314

325

320

320

EPS - basic normalised (p)

 

 

0.01

(0.32)

(0.08)

0.09

3.35

3.87

EPS - diluted normalised (p)

 

 

0.01

(0.32)

(0.08)

0.08

3.31

3.81

EPS - basic reported (p)

 

 

(6.25)

(2.83)

(1.02)

(1.09)

2.42

2.96

Dividend (p)

0.00

0.00

0.00

0.54

0.83

1.02

Revenue growth (%)

(-5.2)

(-4.1)

(-12.5)

39.1

5.8

3.5

Normalised Operating Margin

-0.3

0.5

4.1

7.7

10.5

11.6

BALANCE SHEET

Fixed Assets

 

 

130.9

178.7

173.4

172.6

163.1

154.5

Intangible Assets

101.5

101.0

103.5

103.9

105.0

106.1

Goodwill

9.3

9.3

11.4

11.4

11.4

11.4

Tangible Assets

17.2

13.0

10.5

22.4

19.8

17.2

Right of use assets

0.0

51.4

44.4

35.4

27.4

20.4

Contract assets

0.3

0.6

0.4

0.4

0.4

0.4

Investments & other

2.6

3.3

3.1

(0.9)

(0.9)

(1.0)

Current Assets

 

 

32.4

30.2

52.6

38.7

46.3

52.9

Contract assets

0.5

1.0

1.7

1.7

1.7

1.7

Debtors

13.7

13.4

13.9

18.7

19.8

20.5

Cash & cash equivalents

17.9

15.5

37.0

19.0

27.4

35.5

Other

0.2

0.3

0.1

(0.7)

(2.5)

(4.8)

Current Liabilities

 

 

(22.0)

(27.9)

(29.2)

(33.2)

(34.0)

(34.5)

Creditors

(13.7)

(10.5)

(10.3)

(14.3)

(15.1)

(15.7)

Lease liabilities

0.0

(9.7)

(10.8)

(10.8)

(10.8)

(10.8)

Contract liabilities

(2.5)

(6.3)

(7.7)

(7.7)

(7.7)

(7.7)

Other

(5.7)

(1.4)

(0.4)

(0.4)

(0.4)

(0.4)

Long Term Liabilities

 

 

(17.9)

(65.2)

(62.4)

(49.6)

(37.9)

(25.7)

Lease liabilities

0.0

(46.2)

(40.7)

(28.8)

(18.8)

(8.9)

Contract liabilities

(1.1)

(1.3)

(1.1)

(1.1)

(1.1)

(1.1)

Other long term liabilities

(16.8)

(17.8)

(20.6)

(19.8)

(18.0)

(15.8)

Net Assets

 

 

123.3

115.8

134.5

128.5

137.5

147.2

Shareholders' equity

 

 

123.3

115.8

134.5

128.5

137.5

147.2

CASH FLOW

Op Cash Flow before WC and tax

(13.2)

(2.6)

4.3

10.4

15.5

17.6

Depreciation - Right of use assets

0.0

9.8

9.4

9.0

8.0

7.0

Impairment of goodwill

9.8

0.0

0.0

0.0

0.0

0.0

Branch asset impairment

2.7

4.3

1.7

0.7

0.0

0.0

Gain on disposal of PPE etc

0.1

(0.4)

(0.5)

(0.5)

(0.5)

(0.5)

Working capital

1.3

(2.6)

(0.6)

(0.9)

(0.3)

(0.2)

Exceptional & other

0.0

0.0

0.0

0.0

0.0

0.0

Decrease in provisions

1.2

0.8

(0.8)

(1.0)

(1.0)

(1.0)

Share based payment charges

1.3

0.7

1.0

1.8

2.0

1.9

Cash settlement of share incentive plan

0.0

(0.4)

0.0

0.5

0.5

0.5

Tax

(1.5)

0.2

0.2

(0.8)

(1.8)

(2.2)

Net operating cash flow

 

 

1.8

9.8

14.7

19.2

22.4

23.1

Capex

0.2

(0.3)

(0.4)

(0.4)

(0.4)

(0.4)

Acquisitions/disposals

(2.0)

(0.2)

(3.9)

(17.6)

(0.1)

(0.1)

Net interest

0.0

0.0

0.0

0.1

0.1

0.2

Dividends

(0.7)

0.0

0.0

0.0

(1.8)

(2.7)

Repayment of lease liabilities

0.0

(12.0)

(10.0)

(14.0)

(12.0)

(12.0)

Purchase of own shares

0.0

(0.1)

(0.3)

(5.7)

(0.3)

(0.3)

Net proceeds from issue of ord. Shares

0.0

0.0

21.1

0.0

0.0

0.0

Other

0.0

0.3

0.3

0.3

0.3

0.3

Net Cash Flow

(0.7)

(2.4)

21.5

(17.9)

8.3

8.1

Opening net debt/(cash)

 

 

(18.6)

(17.9)

(15.5)

(37.0)

(19.1)

(27.4)

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

 

(17.9)

(15.5)

(37.0)

(19.1)

(27.4)

(35.5)

Closing net debt/(cash) (inc. lease liabilities)

(17.9)

40.4

14.6

20.6

2.3

(15.8)

Source: Company accounts, Edison Investment Research

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NSW 2000, Australia

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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