Every week brings fresh evidence that the mainstream housing market is recovering. Mortgage approvals rose to their highest level since the 2009 bounce in May, while the latest Halifax house-price index showed the highest year-on-year gain for three years. Aim-listed estate agent Winkworth (WINK) should benefit - and, with its stock trading at a discount to peers, so should its shareholders.
- Recovering housing market
- Substantial, well-covered dividends
- Well-run family business
- Valuation discount to peers
- Competitive industry with low barriers to entry
- Illiquid shares
Winkworth is more familiar to your average Londoner - it has 61 outlets in the capital - than to your average investor. With a market cap of just £16.3m, the brand punches above its weight because it is run purely on a franchise basis. Every outlet is independent, but gives 8 per cent of its revenues to the listed entity M Winkworth in exchange for its name and other central services.
The result is a tiny yet lucrative operation that churns out cash using very little capital. House broker Liberum expects dividends this year of 5.3p, giving a yield of 4.1 per cent. Even after this payout, which is about one-and-a-half times covered, the company generates healthy surpluses - it has next to no debt and a cash pile of £1.6m.
The company has also chalked up a quietly impressive track record of growth since flotation in November 2009. There were only 7 per cent more housing transactions in 2012 than in 2008, yet Winkworth’s revenues were 45 per cent higher. Profits did fall last year because the company closed its French operation and wrote off its old website, incurring £277,000 of exceptional costs. But the core UK business continued to expand.
That's partly due to the company's focus on the more buoyant London market. But it also bears witness to sensible long-term thinking on the part of chairman Simon Agace, who built up the franchise business in the 1980s, and his son Dominic as chief executive. They have used the flotation proceeds and climate of pessimism to lure estate agents in upmarket Southern towns such as Exeter, Oxford and Lewes into their network, recruiting eight branches last year and 11 the year before. This has not only boosted market share but also positioned Winkworth for the long-awaited upturn in the regional housing market.
M WINKWORTH (WINK) | ||||
|---|---|---|---|---|
| ORD PRICE: | 129p | MARKET VALUE: | £16.3m | |
| TOUCH: | 127-130p | 12-MONTH HIGH: | 129p | LOW: 81p |
| DIVIDEND YIELD: | 4.5% | PE RATIO: | 15 | |
| NET ASSET VALUE: | 26p* | NET CASH: | £1.6m | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 3.71 | 1.11 | 7.03 | 4.30 |
| 2011 | 3.98 | 1.20 | 7.11 | 4.60 |
| 2012 | 4.29 | 1.07 | 5.96 | 4.90 |
| 2013** | 4.50 | 1.40 | 8.10 | 5.30 |
| 2014** | 4.80 | 1.50 | 8.80 | 5.80 |
| % change | 7% | 7% | 9% | 9% |
Normal market size: 1,000 Matched bargain trading Beta: 0.2 *Including intangibles of £1.1m, or 8p per share **Liberum Capital estimates | ||||
Thanks to various government initiatives, this now seems to be gathering pace. The optimism has fuelled a general rerating of housing-related stocks, including Winkworth's, which is up 47 per cent year-to-date. Yet relative to peers the company remains cautiously valued based on metrics that take balance sheet strength into account. The enterprise-value-to-operating-profits muliple of 10.2 times (based on Bloomberg consensus forecasts for the next 12 months) is the same as of Belvoir, another Aim-listed franchise we tipped back in December, even though, as a lettings specialist, it is not exposed to the recovery in transaction volumes. LSL and Countrywide, much larger agents but with lettings-to-sales spreads, trade on muliples of 12.8 and 21 times respectively.
The company's diminutive size may account for much some of the discount but the London focus is of value. The shares are also fairly illiquid, not least because the Agaces control roughly 60 per cent of the stock.
