The Purplebricks (LSE: PURP) share price currently sits at 17.14p. Having fallen a colossal 73% over the last 12 months, the stock has suffered a rather brutal year.
The UK real estate agent offers an industry-unique model. It provides instructions at fixed rates via its digital platform. Yet extensive operational costs and lack of consumer engagement have clearly driven investors away.
The share price rebounded in mid-August (roughly 12%) when Chairman Paul Pindar purchased 1.5m shares. This pulled the stock’s market cap just above £50m. Yet the company’s performance remains fairly poor.
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However, a plunging Purplebricks share price may be opportunity for me to grab shares at a bargain cost. Let’s take a look.
Changing the model
Investing in property shares is a staple choice for long-term investors. The housing market has shown consistent returns over the last decade. But in the case of Purplebricks, its operational model raises concerns.
The company has driven a transition of 600 employees to permanent positions through a £2.2m investment over the last few years. Management intended this shift to enhance its field force and increase instructions. However, instructions fell 31% to 40,141 in FY22. Gross profits followed, dropping to £42.1m from £57.7m in FY21. Indeed, Paul Pindar stated that the new model “has yet to deliver the expected improvement in performance”.
This transition also led to a cash outflow from investing of £5.1m, compared to an inflow of £30.4m in the year previous. While this seems worrying, it actually results from Purplebricks’ sale of its Canadian business in FY21, creating £36.4m in cash.
This means total cash for FY22 sits at £43.2m — enough to mitigate the financial consequences of the employee model transition. However, this investment is yet to produce intended results and the company’s gross profit has fallen an alarming 37%. This doesn’t lead me to have confidence in management’s capabilities.
Fixed rates
A key aspect of the company’s model is its fixed rate offering. Most real estate businesses offer instructions on a commission basis. While this distinguishes Purplebricks within the industry, it hasn’t helped it.
The UK property market saw a rise in sales this year — driving companies’ commission profits upward. With a fixed fee model however, Purplebricks was left out of the party. Indeed, its market share decreased from 4.6% to 3.4%.
In response, the company raised flat fee rates by 20%. This could potentially help the gross profit back bounce in FY23. However, this pricing increase arrives at a time when consumer engagement in Purplebricks has spiralled downwards. Higher prices definitely won’t help.
But CEO Helena Marston has stated plans to remove £13m in costs during FY23. I think a 16% reduction in the operating cost base is the right move. Management has unsuccessfully attempted to accelerate operations. A conservative approach for the year ahead is necessary.
Purplebricks remains in a grave situation. While total cash has kept afloat through the disposal of the Canadian business, it may begin to sink. Huge change to its operating model and continued fixed rates have failed to increase instructions. I think the Purplebricks share price is set to fall further. I won’t be adding this real estate agent to my portfolio any time soon.
