Foxtons grows amid challenging conditions

London estate agency Foxtons (FOXT) faces a tough 2023. With interest rates likely to stay high and low unemployment meaning fewer forced sales than in previous downturns, there is the strong possibility that the market won’t so much crash as freeze – with fewer transactions all round rather than a similar number of transactions but at lower prices.

Consensus forecasts compiled by FactSet price the shares at 13.1 times their predicted earnings for 2024, which is cheaper than its online competitor Rightmove (RMV). However, the physical estate agency presence of Foxtons makes it much more expensive to run than Rightmove and as such much less immune to worsening market conditions knocking the wind out of revenue. Between 2018 and 2020, Foxtons posted three consecutive pre-tax losses even though its revenue hovered around £100mn. In its results for the last calendar year, it posted £140mn in revenue but only a fraction of that in pre-tax profit.

Foxtons recognises that 2023 will be difficult sales-wise, but its hope is that its letting and financing business will pick up the slack. This is not an unreasonable assumption. Between 2021 and 2022, its lettings business and its financing business grew 18 per cent and 8 per cent respectively as its sales business grew just 1 per cent. In its next set of results, investors can expect that sales revenue to fall while the UK’s continued dearth of rental properties – especially in London where Foxtons operates – gives its rental business scope to grow.

The waters ahead are choppy, but we think improved trading and greatly improved dividend payments mean the price represents better value than when we last rated this company a Sell. As such, we are upping our rating. Hold.

Last IC view: Sell, 54.6p, 1 Aug 2021