Foxtons hails lettings success as sales struggle

The state of the housing market has been both a blessing and a curse for Foxtons (FOXT). The London estate agent's results for the six months to 30 June revealed a slowdown in home sales had hit its revenues on that side of the business, while the highest rents on record contributed to a surge in revenue on the lettings side of its business. Taken together, it amounted to a bump in revenue and pre-tax profit.

The shares were up 4 per cent on the day of its results, but challenges remain. The adjusted operating margin improved by 11 basis points during the period to 9.6 per cent. That's encouraging, but new chief executive Guy Gittins, who took the helm in September, will want that improvement to continue. The possibility of peak inflation may help to bring that margin up over the next few years, but that relies on forces beyond Foxtons' control.

Foxtons' balance sheet also deserves investor attention. It has been depleting its cash reserves to invest in the company, and the result is a negative net free cash flow of £4.3mn after £2.8mn in positive net free cash flow the year before. Most of this was £9mn spent on “the introduction of shorter landlord billing periods to improve competitiveness and portfolio retention”. It could be a wise investment, or it could be a costly error. Right now, it’s not clear either way.

Priced at 11 times earnings and a marginal discount to net asset value, we do not think the shares will sink much lower and could even grow, so long as its lettings business keeps improving as planned and UK house sales recover next year. For now, we reiterate our call. Hold.

Last IC View: Hold, 42.4p, 08 Mar 2023