The UK housing market is not an obvious source of growth - outside London, house prices have been sagging for over two years. Yet this has created winners, too, above all in the private rented sector. That's the main reason to buy shares in Belvoir Lettings (BLV), one of this year's most successful flotations on Aim.
- Franchise business model
- Long-term growth in lettings
- Management's track record
- Generous dividends
- Low barriers to entry
- Rapid expansion is risky
A decade ago, 70.5 per cent of British homes were owner-occupied. That share has fallen to 66 per cent. The slack has been taken up by the private rental sector, which houses 70 per cent more households now than it did in 2002. This is most likely a long-term shift. With the average first-time buyer deposit running at about 80 per cent of income compared with 10-20 per cent in the 1990s, Britons will surely buy later and rent for longer.
Belvoir, which runs a lettings franchise business from its Grantham head office, is a useful way to play this theme. It has 144 outlets, of which it owns just four. The rest pay Belvoir 12 per cent of their turnover as a monthly 'management service fee', the financial cornerstone of the company.
Revenues from service fees have been increasing at an impressive clip. They were 9.6 per cent higher in the first half of this year than in 2011, but the track record of growth extends much further back. Monthly fee income has increased from £20,000 to £240,000 over the past decade.
Overall revenue growth was higher, at 17 per cent, because the company received £190,000 in training and start-up fees from new franchisees (against £67,000 last year). Belvoir is using the £6.2m of cash it received from its February flotation to accelerate its rollout programme, in three ways. First, it can use the money to expand its portfolio of centrally run outlets - as it has done this year in Lichfield, Burton and Pimlico.
BELVOIR LETTINGS (BLV) | ||||
|---|---|---|---|---|
| ORD PRICE: | 116p | MARKET VALUE: | £24.04m | |
| TOUCH: | 110-116p | 12-MONTH HIGH: | 116p | LOW: 75p |
| DIVIDEND YIELD: | 5.0% | PE RATIO: | 23 | |
| NET ASSET VALUE: | 8p | NET CASH: | £1.74m | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 3.38 | 0.93 | n.a. | n.a. |
| 2009 | 3.03 | 1.21 | n.a. | n.a. |
| 2010 | 3.26 | 1.56 | n.a. | n.a. |
| 2011 | 3.35 | 1.46 | n.a. | n.a. |
| 2012* | 4.20 | 1.40 | 5.1 | 5.8 |
| % change | +25 | +4 | – | – |
Normal market size: 3,000 Market makers: 3 *Seymour Pierce forecasts | ||||
Second, it can take on new franchisees. The company receives about 1,000 enquiries a year, of which it recruits at most 20, according to Belvoir's broker, Seymour Pierce. Finally, existing franchisees can open new outlets. In the boom years they could finance their own set-up or expansion by taking out bank debt, but that's harder now. Instead, franchisees increasingly look to Belvoir for start-up loans.
Rapid expansion invariably comes with risks. Belvoir could lend to the wrong franchisees, incurring bad debts, or overpay for acquisitions - risks made more acute by the easy-come, easy-go nature of the lettings business.
Yet regulation of the rental market is increasing, and bank loans are hard to come by, so the barriers to entering this market are not quite as low as they used to be. Belvoir has been well-run so far, judging by its financial track record. Last year's operating profit margin was 53 per cent, and underlying earnings have grown steadily since 2008.
