Shareholders in online estate agency Purplebricks Group (LSE: PURP) have suffered badly over the last year. Shares in the firm are down by 25% at the time of writing, and have fallen by more than 70% over the last 12 months.
Unfortunately, I think the shares may continue to fall. As I’ll explain, even at current levels the group’s valuation looks too high to me.
What’s gone wrong?
Purplebricks now expects revenue for the current year to be between £130m-£140m, about 20% lower than previous guidance of £165m-£175m. The company blames “challenging” conditions in the UK and Australia and an unsuccessful marketing campaign in the US for this shortfall.
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I suspect problems may run deeper. The company warns that UK sales growth is likely to slow to 15-20% this year, compared to 80% last year. Are sellers finding better deals elsewhere?
In the US, the firm says it has recently moved to a pay-on-completion business model. This sounds to me like a standard no-sale, no-fee arrangement. I’d expect this to result in slower revenue growth.
A final concern is that the firm is losing two key managers at the same time. The chief executives of the UK and US businesses will both leave shortly, having been with the outfit for just two years.
I won’t be investing
Neil Woodford’s funds own 27% of Purplebricks, making him the group’s biggest shareholder. His shareholding is probably too big to sell without destroying the share price, so I guess he’ll have to remain patient and hope things improve.
This business could succeed — I’m sure there’s space for online-based estate agents in the market. But as I’ve commented before, despite its online model, the company still has an extensive network of agents. So it doesn’t have the low-cost structure and scalability of a true online business.
Another concern is the amount of money being spent on overseas expansion. If management had focused its efforts on building a profitable and successful business in the UK, I might be more interested. But the firm is spending millions on loss-making efforts to break into Australia, Canada and the US. That seems too ambitious to me.
Analysts expect a loss of 12.9p per share this year, or about £40m. A further loss is expected next year. Even after today’s fall, this loss-making company is still valued at about three times its sales. That looks much too expensive to me.
An agent I’d buy
LSL Property Services (LSE: LSL) lacks the catchy name and trendy advertising of Purplebricks. But this group, whose businesses include estate agents Reeds Rains, Your Move and Marsh & Parsons, looks much more appealing to me.
Last year, LSL reported revenue of £312m and an underlying operating profit of £37.5m. A similar result is expected for 2018. Despite these favourable figures, the group’s market capitalisation is just £254m. That’s roughly 30% below Purplebricks.
In my view, LSL’s 11% operating margin and strong cash generation make it of much more interest than Purplebricks. I’d also note that this smaller firm has a sizeable lettings business and this should help support earnings even if the housing market slows.
LSL shares currently trade on a 2018 forecast price/earnings ratio of 9.7 and offer a 4.1% dividend yield. This payout should be covered 2.5 times by earning, suggesting that it’s quite safe. I’d rate LSL as a possible buy.
