Foxtons warns on profits

Focused on the top end of the London housing market, estate agent Foxtons (FOXT) had already indicated that trading volumes in the second half would start to slow. But the pace of that decline has accelerated, prompting the group to warn in its third-quarter update earlier this month that full-year profits will be down on the prior year's figure. Shareholders showed their concern by trimming the share price by nearly 18 per cent on the day the news appeared.

Management blamed the slowdown on political uncertainty in the UK, ahead of the general election, as well as a tighter mortgage lending market and economic uncertainty in Europe. These factors, it seems, have dented buyer confidence. That said, the third-quarter performance needs to be set against some tough comparatives, and trading in the nine months to end-June saw volumes reach their highest levels since 2007. The group has also continued to expand its branch network and, during the third quarter, generated £13.9m of adjusted operating cash, giving a cash conversion rate of 98 per cent. There's no debt on the balance sheet, either. The group's cash profit margins in the third quarter did fall from last year's record 43.7 per cent, but still reached an impressive enough 35.6 per cent.

Numis Securities says...

Buy. We are reducing our 2014 and 2015 forecasts for cash profits by 16 per cent and 19 per cent, respectively, but even with market conditions levelling off we still expect to see 10 per cent cash profit growth in 2015. Assuming a flat market, we expect this growth to come from a continued roll-out of new branches. Indeed, we continue to believe in the fundamentals of the Foxtons model of strong cash generation and self financed organic growth and our price target stands at 290p. Expect 2014 full-year adjusted pre-tax profits of £42.4m and EPS of 11.8p (from £42.1m and 13.3p in 2013) and a 10.3p dividend.

Credit Suisse says...

Outperform. We have reduced out targets but, given the strong balance sheet, the cash return profile and the prospect of an expanded branch network across London, we maintain our outperform stance. While current trading is clearly very challenging, we expect trading conditions and investor sentiment to be much improved by the second quarter of next year. However, we are trimming our forecasts for the current year to give adjusted pre-tax profits of £44.8m and EPS of 12.5p, rising to £52m and 14.6p in 2015.