Join our community of smart investors

Sell Purplebricks' high-risk expansion

The online estate agency's is relying on revenue growth outpacing rapidly rising operating costs
April 25, 2019

Purplebricks (PURP) has been spending big to boost its share of the UK and international estate agency markets. While the group has been completing an increased number of property sales, hefty marketing and platform development costs mean it has yet to turn a statutory profit. What’s more, sluggish housing markets in the UK and Australia and a weaker take-up of its services in the US forced management to warn in February that revenue for 2019 would come in below previous guidance.  

IC TIP: Sell at 122.4p
Tip style
Sell
Risk rating
High
Timescale
Medium Term
Bull points

Net cash position

Gaining market share

Bear points

Weak UK/Australian housing markets

Rising operating costs

Revenue warnings 

No dividend

The online estate agency differs from traditional operators by charging an upfront fee rather than commission based on the sale price. While instructions and revenue have been growing rapidly – with the latter up by three-quarters during the first half of the year – so too have costs associated with attracting new customers and expanding geographically. During 2018 and the first half of 2019, growth in marketing and administrative expenses has outpaced the increase in revenue, which resulted in a rise in pre-tax losses.

The increase in marketing and administrative costs has resulted from efforts to gain not only UK market share, but also increase its footprint in the US and Australian property markets, as well as Canada via its July acquisition of DuProprio. In Australia, revenue grew by more than a quarter during the first half, although instructions were 9 per cent lower. What’s more, costs associated with restructuring and repositioning the business meant operating losses almost doubled to Aus$10.2m (£5.6m). Meanwhile, US operating losses more than trebled to $20.5m (£15.8m) as the group expanded to seven states.  

Purplebricks reckons it accounts for around three-quarters of the UK online estate agency market, but the market looks sluggish. Growth in UK transactions has stalled after dropping from a 2016 peak of 1.32m, according to the Office for National Statistics. And while transactions in February grew by 2.7 per cent, house prices were up just 0.6 per cent, the lowest annual growth in seven years, which could result in further stagnation in the UK housing market.   

The effects of that slowdown have already started to make an impact on Purplebricks’ revenue growth. Although UK revenue is anticipated to be 15-20 per cent ahead of the previous year, management said it expected group revenue to come in at between £130m and £140m, behind the £165m-£175m previously expected. That guidance had already been narrowed from a range of £165-£185m upon the release of first-half results in December. House broker Peel Hunt increased its forecast adjusted cash loss to £50m for 2019, up from the £42m, following the latest warning and does not expect a statutory pre-tax profit until 2021. 

Along with a slowdown in the UK and Australian property markets, management said it had received “a slower-than-expected response to the second US marketing initiative”, which concluded towards the end of January. Although the group said there were “some early positive signs” from its third marketing campaign and a recent change in business model to payment on completion, it said US revenue would miss expectations. What’s more, group cash balances had declined to £71m at the end of January, from £103m at the end of October.

At the time of February’s warning, the group announced that UK chief executive Lee Wainwright and US chief executive Eric Eckardt would both shortly be leaving the business, following a joint decision with the board. Mr Wainwright will be replaced by chief operating officer Vic Darvey in the interim, while group chief executive Michael Bruce will take the reins in the US.

PURPLEBRICKS (PURP)    
ORD PRICE:122.4pMARKET VALUE:£371m
TOUCH:120.4-122.4p12-MONTH HIGH:411pLOW: 99.8p
FWD DIVIDEND YIELD:nilFWD PE RATIO:na
NET ASSET VALUE:41p*NET CASH:£103m
Year to 30 AprTurnover (£m)Pre-tax profit (£m)**Earnings per share (p)**Dividend per share (p)
201618.6-9.8-3.3nil
201746.7-6.1-1.2nil
201893.7-26.2-9.8nil
2019**165-51.0-15.6nil
2020**232-28.1-9.3nil
% change+41-45-40-
Normal market size:5,000   
     
Beta:1.35   
*Includes intangible assets of £41m, or 14p a share
**Peel Hunt forecasts, adjusted PTP and EPS figures